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* Shanghai falls 1.6 percent; Hong Kong drops 0.7 percent
* China funding squeeze adds to policy tightening fears
* China financials sink, firmer dollar hits resource plays
* Exporter Li & Fung continues to shine, hits fresh high
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By Jun Ebias and Farah Master
HONG KONG/SHANGHAI, Nov 30 (Reuters) - Shares in Shanghai fell on Tuesday, dragging down stocks in Hong Kong, as mainland banks and brokerages rushed to raise cash after a slew of tightening measures this month left them short of funds.
Reflecting the dash for cash, China's benchmark short-term money market rate jumped early on Tuesday to its highest in more than two years. [ID:TOE6AT04N]
The Shanghai Composite Index ended down 1.6 percent at 2,820.2 points, a level not seen since early October. The index has fallen 5.3 percent this month after rising 12 percent in October.
Hong Kong's benchmark Hang Seng Index fell 0.7 percent at 23,0007.99. It lost 0.4 percent in November, its first monthly loss in three months.
Analysts said the funding squeeze in mainland China was prompting investors to sell heavily weighted financials and commodity issues in Shanghai to raise cash.
Chinese markets have already been on edge for weeks, fearing the central bank would introduce further tightening measures to curb inflationary pressures, such as additional hikes in bank reserve requirements and more interest rate increases.
"The falls are unreasonable. This is just panic selling with investors selling to avoid more risk at this point," said Ren Chengde, analyst at Galaxy Securities in Shanghai.
Traders said the squeeze was exacerbated as banks were also in need of cash to meet month-end regulatory requirements after a recent lending binge.
Financials were among the biggest losers, with Industrial and Commercial Bank of China , the world's most valuable lender, down 2.1 percent and Merchants bank 1.7 percent lower.
Top broker Citic Securities fell 2.7 percent,
Volume jumped from lacklustre levels seen this month, with fierce selling of small cap drug shares after the government announced measures to cut the prices of 17 types of medicines.
Tonghua Dongbao Pharmaceutical , for example, dropped 7.4 percent.
Turnover of Shanghai A shares rose to 172 billion yuan ($25.86 billion) from 133 billion yuan on Monday.
OIL AND METALS PLAYS LEAD HK LOWER
Hong Kong was not hit as hard as those in Shanghai, although oil and metals counters were sharply lower, underperforming the broader market.
After a rally early this month, investors have been shedding holdings of Hong Kong shares, fretting about China's plans to curb inflation, debt problems in Europe and, more recently, political tensions on the Korean peninsula.
"Investors are dumping shares because they are afraid of rate increases down the road," said Alfred Chan, chief dealer at Pearl Investment. "Banks are not going to be lending money as liberally as they wish because the government has capped lending for next year. Corporate earnings will be restricted."
Sinopec fell 1.9 percent, Aluminum Corp of China dropped 1.6 percent, while Jiangxi Copper lost 1.8 percent.
Bucking the trend, Li & Fung Ltd , which supplies goods to U.S. retailers such as Wal-Mart Stores Inc , rose 1.4 percent after touching a fresh record high in the morning session.
The stock has jumped 11 percent in the last four sessions, including Tuesday's gains, as investors bet that U.S. consumer spending was picking up, as evidenced by brisk Thanksgiving holiday sales.
Deutsche Bank AG
Johnson Electric Holdings Ltd soared nearly 13.0 percent. The micro motor maker, another play on the consumer demand recovery story, said it had posted a 27 percent rise in sales for the six months ended September, while net profit rose to $93 million from $14.6 million a year earlier.
Volume of trade rose to HK$101 billion ($13 billion), the highest in two weeks. (Editing by Kim Coghill)