SHANGHAI, July 21 (Reuters) - China's stocks fell on Friday but ended the week higher, with demand for blue chips gaining momentum amid a slump in small-cap stocks, as investors sought firms with solid growth prospects and lower valuations.
The blue-chip CSI300 index fell 0.5 percent, to 3,728.60 points, while the Shanghai Composite Index lost 0.2 percent to 3,237.98 points.
For the week, the two indexes gained 0.7 percent and 0.5 percent, respectively, erasing losses earlier this week when investors dumped start-ups stocks.
"Blue chips found favour with investors as they attach great importance to performance and valuations at listed firms due to curbed risk appetite amid tighter financial regulations and liquidity conditions," said Xu Wei, analyst with Hongxin Securities.
Xu expects tighter regulations to continue as a largely stable economy allows Beijing more leeway to tackle bubbles.
Among blue chips, Shanghai-listed China Molybdenum Co Ltd , a major non-ferrous metals producer in China, has gained 16.8 percent this week. The stock is up more than 45 percent so far this month.
China's economy expanded 6.9 percent in the second quarter, defying expectations for a slight loss of momentum in growth.
Fitch Ratings said on Thursday China's renewed commitment to contain financial risks signals a possible shift away from high economic growth targets, though policymakers are likely to remain cautious about tightening too aggressively.
China's opening up its stock market to foreign investors by the Shanghai, Shenzhen and Hong Kong connect programmes, as well as by the MSCI's decision to include China stocks, also helped prompt a rotation into blue chips, Xu added.
U.S. index provider MSCI has agreed to add 222 China-listed large-cap stocks to its Emerging Markets Index (EMI), tracked by around $1.6 trillion. China Molybdenum is among them.
In sharp contrast with strong gains in blue chips, the tech-heavy start-up board ChiNext lost 3.2 percent for the week, hovering around 30-month lows after a 5.1 percent slump on Monday, as market participants shunned firms that feature dim performance and higher valuations.
The index is almost 60 percent below a record high hit in June 2015.
For the week, materials shares far outperformed the broader market, with an index tracking those firms leaping 5 percent, after they forecast surges for mid-year earnings growth, helped by expectations China would continue to push supply-side reforms and keep its economy largely stable. (Reporting by Luoyan Liu and John Ruwitch; Editing by Jacqueline Wong)