* Mainland markets rally in early morning led by banks
* China published draft plan for deposit insurance Sunday
* Mainland, Hong Kong markets pricing difference widening
By Pete Sweeney
SHANGHAI, Dec 1 (Reuters) - China and Hong Kong stocks were mixed on Monday as investors took divergent views on the implications of a deposit insurance draft plan, with bank shares in Shanghai rising even as Hong Kong traders continued to sell them off.
China issued draft regulations on Sunday to introduce a bank deposit insurance system for the first time, the latest in a series of steps to fully liberalise interest rates and allow banks to compete on a wholly commercial basis.
The difference of investor opinion over the consequences was highlighted by an index measuring price premiums and discounts between dual-listed companies in Shanghai and Hong Kong , which rose 2.5 percent on Monday to 109.28, its highest level since July 2013.
A value above 100 indicates Shanghai shares are pricing at a premium to shares in the same company trading in Hong Kong, and vice versa.
For example, the price of Bank of China's Shanghai listed shares stood at 3.36 yuan, compared with its Hong Kong share price at HK$3.97, equivalent to 3.1472 yuan as of 11:07 a.m., an implied discount of 6.3 percent.
Mainland-listed banking shares began rallying on Friday afternoon for unclear reasons, with the index of major Chinese banks gaining more than 8 percent in a single day. It rallied again on Monday morning, led by Everbright Bank and Bank of Communications, but lost steam around 10:30 a.m. (0230 GMT), remaining up 0.5 percent at 4,276.04 points, its highest level since February 2013.
Analysts said that the difference in pricing reflected different priorities. Mainland investors have been steadily pushing up domestic indexes as the central government has signalled a softening stance on liquidity and interest rates, seen as both good for propping up wobbling economic growth and at the same time reducing the risk for domestic banks of getting stuck with more non-performing loans.
Growth in Chinese factories stalled in November as output shrank for the first time in six months, reinforcing expectations that authorities will roll out more aggressive stimulus measures after unexpectedly cutting guidance lending rates earlier in the month to shore up growth.
Hong Kong investors, on the other hand, are worried about the weak fundamentals that prompted the easing measures in the first place, and consider the deposit insurance programme negative for banks as it will require them to contribute a portion of their capital into a pool for use in payouts.
Ben Kwong, head of research and director of KGI Asia in Hong Kong, said the deposit insurance system, when launched, will put more pressure on banks' profit margins as they raise deposit rates to compete for clients.
"Of course it is bad news (for banks). It reflects the trend that the central bank will further liberalize interest rates."
The CSI300 index of the largest companies listed in Shanghai and Shenzhen rose 1.3 percent, to 2,845.29 points at mid-morning, while the Shanghai Composite Index gained 0.8 percent, to 2,704.14 points, both remaining at multi-year highs.
Hong Kong's Hang Seng index, however, dropped 1.7 percent, to 23,569.19 points after ending November down slightly. The Hong Kong China Enterprises Index was down 1.2 percent, to 11,012.27. (Additional reporting by the Shanghai Newsroom and Jake Spring in BEIJING; Editing by Alex Richardson)