China and Hong Kong stocks have fallen more than one percent, as S&P's cut to China's credit outlook offset any optimism from a pick-up in March manufacturing activity.
Analysts also attributed the slide in mainland equities on Friday morning to renewed government efforts to reduce leverage, investor caution ahead of the Tomb Sweeping Day holiday, and expiration next week of a three-month share sales restriction imposed during January's market rout.
China's blue-chip CSI300 index fell 1.5 percent, to 3,170.36 points by the lunch break, while the Shanghai Composite Index lost 1.4 percent, to 2,961.22 points.
In Hong Kong, the Hang Seng index dropped 1.3 percent, while the Hong Kong China Enterprises Index lost 2.3 percent, to 8,800.37.
Rating agency Standard & Poor's on Thursday cut its outlook for China's sovereign credit rating to negative from stable, but maintained the rating at AA-, saying the government's reform agenda is on track but likely to proceed more slowly than expected. At the same time, S&P also downgraded the outlook for Hong Kong.
The negative sentiment from the downgrade was not countered by Friday's release of the official Purchasing Managers' Index (PMI), which showed activity in China's manufacturing activity unexpectedly expanded in March for the first time in nine months.
"Whether China's economy has hit bottom still needs more proof," said Zeng Yan, analyst at Zhongtai Securities.
"It's a very sensitive time for the market so any negative news would prompt investors to reduce their positions, especially ahead of Tomb Sweeping Day."
China's markets will be closed on Monday for the holiday.
Sentiment was soured by state media reports that China's banking regulator has urged trust firms to strengthen risk management in their securities investment businesses, and put a cap on leverage in structural products that invest in the stock market.
There are also concerns about increasing share supplies, as a ban prohibiting major shareholders from selling more than one per cent of total shares in their companies in the stock market will expire on April 9.
Nearly all main sectors fell in China and Hong Kong.
Guosen Securities dropped 2.1 percent. Its Hong Kong unit late on Thursday denied a Financial Times report it had defaulted on a Hong Kong-traded yuan bond.