* Hong Kong, Shanghai stock indexes up 11 pct in Q3
* Q4 slowdown likely as China reins in banking, property
* ICBC closes at 3-wk low on Goldman's $2.25 bln stake sale
* Chinese property plays rise despite measures to cool market
* Shanghai closed for a week from Friday for National Day (Updates to close)
By Kelvin Soh and Farah Master
HONG KONG/SHANGHAI, Sept 30 (Reuters) - Hong Kong stocks recorded their strongest quarterly performance in a year on Thursday despite retreating from an eight-month high, as Goldman Sach Group Inc's sale of a $2.25 billion stake in Industrial and Commercial Bank of China Ltd weighed on the market.
The benchmark Hang Seng Index has gained about 11 percent this quarter, its best performance since the same period a year ago, but a bout of short-selling could point to weakening investor confidence in any further upside.
"Momentum is beginning to look like it will weaken soon," said Patrick Yiu, a director at CASH Asset Management in Hong Kong. "There is likely to be limited upside for as long as the Chinese government tries to keep things under control, but foreign capital inflows may help things a little."
Short sellers as a percentage of overall turnover clocked in at about 7 percent in morning trade, higher than the 5 percent typically seen in Hong Kong.
On the charts, the Hang Seng Index's relative momentum index (RMI), which moves with the relation to upward and downward changes in the benchmark, is currently hovering around a 13-month high at 80.4, past the overbought 70 level.
The last time it hit such a level was in August 2009, when the index fell more than 6.5 percent in the two weeks after hitting a high of about 82.
Industrial and Commercial Bank of China fell 3.2 percent to HK$5.78 after Goldman watered down its stake in the Chinese lender, amid wider fears that regulators may raise the minimum amount banks must keep in reserve.
The benchmark Hang Seng Index lost 0.09 percent to 22,358.17 after having hit an eight-month high on Wednesday. The China Enterprises Index of top locally listed mainland stocks was down 0.19 percent at 12,406.1.
"We're really looking closely at foreign fund inflows for the fourth quarter," said Peter Lai, a strategist at DBS Vickers, who recommends buying into the Chinese pharmaceutical, infrastructure and retail sectors.
"I'm personally bullish on Hong Kong stocks and think we may have some upside in the next three months."
On the upside, Hong Kong Exchange and Clearing Ltd rose about 1 percent, hovering around nine-month highs, with investors chasing up the stock amid a flurry of upcoming IPO activities including insurer AIA, which has a top-end valuation of $38.8 billion.
Hong Kong ranks 11th on the charts in the third quarter among 30 stock indexes tracked by Thomson Reuters, roughly in line with the S&P 500 and ahead of regional peers such as South Korea's KOSPI and Singapore's Straits Times Index.
SHANGHAI UP ON PROPERTY
China's key stock index ended up 1.72 percent on Thursday, with property shares such as Gemdale Corp unexpectedly jumping after the government announced fresh measures to subdue bubbly prices in the country's red hot real estate market.
Shanghai's stock market, one of the world's worst performing bourses, has gained 11 percent for the quarter ending in September, but is still down about 21 percent so far this year, with China's clampdown on bank lending and the property market having taken a toll despite robust economic growth.
The Shanghai Composite Index ended at 2,655.66 points, after finishing flat on Wednesday. The market will be closed for a week starting on Friday for the week-long National Day holiday.
Shanghai's property sub-index closed up 3.9 percent, with traders saying investors were buying back into the market after property shares slumped since mid-April this year as China clamped down on speculation in the real estate sector.
Analysts cautioned that the rally was likely to be short term with the outlook for the property sector still cloudy.
Major mainland developers were among the most active with Poly Real Estate Group Co Ltd jumping 8.9 percent.
The government has instructed banks to demand a down payment of at least 30 percent from all mortgage applicants and to restrict loans to buyers of third homes.
"The market was expecting negative news on new property controls so now that information is out, property companies like Vanke which have continuously slumped, are able to gain," said Ren Chengde, analyst at Galaxy Securities in Shanghai.
The country's largest listed developer China Vanke Co Ltd rose 7.6 percent, while Gemdale jumped 5.3 percent.
China's property inflation slowed to 9.3 percent in the year to August, down from a peak of 12.8 percent in April, but real estate investment has remained buoyant, with growth picking up to 34.1 percent in the year to August from 33.0 percent in July.
"The intensity of property policies is likely to increase so these gains may just be a short term burst. I expect property shares could gain a maximum of 10-15 percent before falling back," said Zheng Weigang, a senior trader at Shanghai Securities. (Additional reporting by Vikram Subhedar; Editing by Chris Lewis)