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China stocks sink after major banks write off debt

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Chinese equities hit two-week lows on Wednesday after reports emerged that top Chinese lenders, including Industrial and Commercial Bank of China (ICBC), wrote off about $3.7 billion in bad debt for the first six months of the year.

A report from Bloomberg, citing company filings, said that China's five major banks have written off 22.1 billion yuan ($3.65 billion) of debt in the first six months of the year that couldn't be collected, compared to 7.65 billion yuan a year earlier, according to the news agency. The report added that the move is more than likely a cleaning-up process ahead of what may be a fresh wave of defaults in the world's second-largest economy.

(Read more: China's factory sector may contract in October)

China's benchmark index fell to 2,182 points, below its 200-day simple moving average of 2,198 points and weighed on indexes across Asia. Shares of Hong-Kong listed ICBC finished the session lower by 2.22 percent with its four rivals China Construction Bank, Bank of China, Agricultural Bank of China and Bank of Communications all lower by similar margins.

"A lot of this write-off brings Chinese banks closer to a more international standard. In the past, they've put these loans further out into their non-performing portfolios rather than instead of actually writing them off so in some respects, this improves the health of these banks," said Andrew Sullivan, director of Asian Sales Trading in research note.

There was also renewed signs of stress in China's money markets on Wednesday which further accentuated the sell-off. Official Chinese media reports stated that the country's central bank may look to tighten liquidity with a policy adviser to the People's Bank of China (PBOC) telling Reuters news agency on Tuesday the authority may look to tighten to address inflation risks. Data showed a sudden surge in China's benchmark money-market rate, which climbed 57 basis points to 4.02 percent, causing worries about potential liquidity issues in the country's money markets.

(Read more: China agrees renminbi accord with Singapore)

Ishaq Siddiqi, a market strategist at ETX Capital said that concerns from China were weighing on global stocks.

"Interbank lending rates spiked last June when the People's Bank of China withheld liquidity from the banking system in what was widely reported to be an attempt to punish banks engaged in risky activities or shadow banking," he said.

"As such, traders this morning are taking off risk, treading more cautiously ahead of more economic data out this week such as the PMI manufacturing data out of China."

An analyst team at Monex Capital believes that despite investors cheering the possibility of the U.S. Federal Reserve delaying the moderation of its $85 billion-a-month bond buying program, markets are showing real concerns over what's happening is China.

"It's been a difficult session in Asia with a raft of Chinese banks writing off bad debts, leaving some to worry that this may be a case of simply clearing the decks ahead of more news like this in the coming months." it said in research note.

(Watch:China is growing but not rebalancing: Pro)

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