China and Hong Kong stocks dropped on Wednesday, led by a decline in the property sector as market sentiment appeared to cool down from a strong rally.

The weakness also follows a Federal Reserve official's comments that the U.S. central bank may hold rates steady all year to fight inflation, putting outflow pressure on broad Asian stocks.

The CSI real estate index lost 3% by midday, giving up the gains from the previous session.

Morgan Stanley analysts warned that near-term overbought technical signals in China equities have appeared.

"We expect the rally momentum to abate - don't chase at the index level," the analysts, led by Laura Wang, said in a note on Tuesday night.

 

** At the midday break, the Shanghai Composite index was down 0.41% at 3,134.75 points.

** China's blue-chip CSI300 index was down 0.66%, with its financial sector sub-index lower by 0.39%, the consumer staples sector down 0.48%, the healthcare sub-index down 1.44%.

** Chinese H-shares listed in Hong Kong fell 0.42% to 6,499.39, while the Hang Seng Index was down 0.37% at 18,410.20.

** The smaller Shenzhen index was down 1.16%, the start-up board ChiNext Composite index was weaker by 1.23% and Shanghai's tech-focused STAR50 index was down 0.98%​.

** Around the region, MSCI's Asia ex-Japan stock index was weaker by 0.41% while Japan's Nikkei index was down 1.57%.

** The yuan was quoted at 7.2247 per U.S. dollar, 0.09% weaker than the previous close of 7.2181. (Reporting by Summer Zhen; Editing by Janane Venkatraman )