* Blue chips drop on earnings jitters
* Ping An slumps on Fortis carve-up
* China Eastern bucks downward trend on merger talk
(Updates to close)
By Parvathy Ullatil
HONG KONG, Oct 15 (Reuters) - Hong Kong shares slid 5 percent on Wednesday in anaemic turnover as investors locked in gains on a two-day, 14 percent rally amid worries about a slowdown in the global economy and its impact on corporate profits.
Resources stocks were walloped by lower commodity prices, while shippers sank, tracking the hefty 8.5 percent overnight drop on the global freight index .BADI.
But China Eastern Airlines (0670.HK: Quote, Profile, Research, Stock Buzz) avoided the downdraft, climbing 5.4 percent on mainland media reports that the airline's proposed merger with smaller rival Shanghai Airlines (600591.SS: Quote, Profile, Research, Stock Buzz) had been approved in principle by the Shanghai government.
"The rebound is over and the risk of recession as high as ever," said Patrick Shum, strategist with Karl Thomson Securities.
"Governments across the world are cutting welfare spending and issuing more debt to help the financial system. But these measures will create a bigger problem of an economic slowdown."
Governments around the world have pledged roughly $3.2 trillion in schemes that guarantee bank deposits, interbank lending and the purchase of new securities to shore up bank capital. [ID:nLC667557]
The benchmark Hang Seng Index .HSI closed down 834.58 points at 15,998.30. The index has dropped 42 percent so far this year.
"At the current valuations, most of the bad news we have heard so far has been factored in," said Mona Chung, fund manager with Daiwa Asset Management.
Historic valuations of Hong Kong's blue chip stocks still languish at 10 times their price to earnings, the lowest since the Asian financial crisis.
"But people have very different views on what is happening now and what is going to happen, hence the volatility," she said.
After rallying a total of more than 2000 points on Monday and Tuesday, the Hang Seng Index was likely to stay above 15,000 in the short term as the various financial rescue plans were rolled out, said Peter Pak, vice president with BOCI Research.
Mainboard turnover fell to HK$52.2 billion ($6.7 billion) from HK$81.7 billion on Tuesday.
The China Enterprises Index .HSCE of top locally listed mainland Chinese companies slid 6.4 percent to 7,894.06.
Shares in Ping An Insurance (2318.HK: Quote, Profile, Research, Stock Buzz) tumbled 7.4 percent after Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz), in which the Chinese insurer owns a 5 percent stake, was carved up, sending its shares plunging 78 percent after a long suspension. [ID:nLE201918]
The Belgian-Dutch financial group was broken up along national lines this month as governments and investors feared for its viability in the shadow of the liquidity crunch.
Other Chinese financials slid as investors locked in gains on the steep two-day rally in mainland banks and insurers.
Top bank ICBC (1398.HK: Quote, Profile, Research, Stock Buzz) fell 5.9 percent while No.2 lender China Construction Bank (0939.HK: Quote, Profile, Research, Stock Buzz) shrank 6.7 percent.
Offshore oil specialist CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz) dropped 6.3 percent, pulling back from Tuesday's 13.8 percent rally after crude oil prices fell below $80 per barrel, a level critical to market bulls.
Asia's largest oil and gas producer, PetroChina (0857.HK: Quote, Profile, Research, Stock Buzz), fell 6.5 percent.
Shipping stocks were battered by an 8.5 percent slide in the Baltic Dry freight index .BADI overnight on deepening concern over a protracted slowdown in demand for commodities amid a global recession.
Shares in China's largest shipping conglomerate, China Cosco (1919.HK: Quote, Profile, Research, Stock Buzz), plunged 10.5 percent while oil and coal carrier China Shipping Development (1138.HK: Quote, Profile, Research, Stock Buzz) dropped 13.6 percent.
(Editing by Anne Marie Roantree)
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