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China stocks retreat but set to cap 3rd month of gains; HK to post 8th winning month

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SHANGHAI, Aug 31 (Reuters) - China stocks fell on Thursday morning and looked past a survey showing stronger-than-expected factory activity, as some investors took profits at the end of an upbeat earning season that is set to cap the third month in the black for the market.

Hong Kong stocks also took a breather, easing from the highest level in 27 months, but the benchmark index is poised to rise for the eighth month in a row.

China's blue-chip CSI300 index fell 0.8 percent, to 3,802.32 points by the lunch break. The Shanghai Composite Index lost 0.7 percent, to 3,341.83 points, but still stands comfortably above the 3,300-point mark - previously a strong resistance.

"There's fundamental support for SSEC to rise further above 3,300 points, but there needs to be adequate consolidation," Gui Haoming, analyst at Shenwan Hongyuan Securities, wrote in his latest market commentary.

More catalysts are needed to push the market higher, he added.

Investors largely ignored a survey showing growth in China's manufacturing sector unexpectedly accelerated in August, with some analysts questioning whether such a trend is sustainable.

"The latest official PMI readings suggest that China's manufacturing activity may have strengthened in August but point to weaker momentum in the rest of the economy," wrote Julian Evans-Pritchard, China economist at Capital Economics.

"Looking ahead, if we are right to believe that tighter policy will continue to weigh on investment spending in the coming quarters, then we doubt that the current pace of industrial output growth can be sustained for long."

Indeed, interbank rates have been trending higher, reflecting tighter liquidity conditions as banks brace for quarterly regulatory scrutiny at the end of next month.

The banking subindex fell 1.6 percent on Thursday morning after hitting the highest level in nearly two years, as investors pocketed gains, judging newly-published, strong results from China's biggest lenders have been fully priced in.

HONG KONG

In Hong Kong, the Hang Seng index dropped 0.6 percent, to 27,929.90 points, while the Hong Kong China Enterprises Index lost 1.1 percent, to 11,249.55.

(Reporting by Samuel Shen and John Ruwitch; Editing by Shri Navaratnam)