SHANGHAI stocks declined in the morning session, dragged down by the banking sector, after China removed controls on lending rates.

The Shanghai Composite Index shed 10.44 point, or 0.52 percent, to 1,982.21. Turnover was 39.3 billion yuan (US$6.4 billion) by the noon break.

Lenders tumbled after China's central bank on Friday said it would scrap the floor on loan rates effective on Saturday, a long-awaited move toward liberalizing the financial sector.

"The move will have a limited impact in the short term because of the on-going tight liquidity," said the Orient Securities in a report.

"But in the long run the liberated lending rate may compress banks' interest margins, especially for large and medium-sized lenders who usually cater to big companies that have advantages in bargaining ability," the broker said.

The Industrial and Commercial Bank of China Ltd, the nation's largest lender, fell 0.8 percent to 3.92 yuan. China Construction Bank Corporation lost 1.4 percent to 4.30 yuan. China Merchants Bank dropped 2.3 percent to 10.67 yuan.

Shares of most cyclical industries including coal producers, steelmaker and glass manufacturers were among the biggest losers while small-cap firms advanced.