June 1, 2017 / 5:10 AM / a year ago

China stocks fall as manufacturing activity slows; Hong Kong up

* SSEC -0.5 pct, CSI300 -0.1 pct, HSI +0.4 pct

* China May factory activity contracts in May - Caixin PMI

* Hong Kong property index rises to near 9-month high

SHANGHAI, June 1 (Reuters) - China stocks started the month on a bearish note early on Thursday, after a private survey showed the country’s manufacturing activity unexpectedly shrank in May for the first time in 11 months, stirring fears of renewed economic slowdown.

The upbeat mood of the previous session - triggered by regulators’ share sale restrictions - evaporated, as worries deepened that excessive government intervention would suck the market’s vitality.

The blue-chip CSI300 index fell 0.1 percent, to 3,488.36 points by the lunch break, while the Shanghai Composite Index lost 0.5 percent, to 3,101.37 points.

Sentiment was hit by the Caixin/Markit Manufacturing Purchasing Managers’ index (PMI), which painted a gloomy picture, and sharply contrasts with official PMI readings on Wednesday.

The index fell to 49.6, weaker than expected, below the 50-point mark which demarcates growth and contraction, and marked the third month in which the index has fallen.

The fall in the Caixin index appears “consistent with the recent decline in the price of industrial metals” and is “consistent with our broader outlook on the Chinese economy,” said Julian Evans-Pritchard, China Economist at Capital Economics, in a research report.

“After all, we have long been warning that the rebound in growth during the second half of last year would prove short-lived.”

And after the market’s fleeting euphoria toward regulators’ rules restricting share sales by listed companies’ big shareholders, investors now contemplated the rules’ side affects.

Chen Xi, strategist at Dongguan Securities, said regulators’ tougher restrictions on share sales, which were intended to stabilise the market, could backfire, as “capital would think twice before entering the stock market, “potentially hurting stock valuations, especially for small caps.

Small-cap stocks led the market’s decline on Thursday, with the start-up board ChiNext dropping over 1 percent.

In Hong Kong, stocks were firm, aided by continuous strength in the property sector.

The Hang Seng index added 0.4 percent, to 25,749.34 points, while the Hong Kong China Enterprises Index lost 0.2 percent, to 10,579.44.

An index tracking property shares jumped 0.8 percent to the highest in nearly nine months, as China Evergrande Group surged roughly 5 percent, after unveiling plans to raise $5.8 billion.

Reporting by Samuel Shen and John Ruwitch; Editing by Jacqueline Wong

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