Hong Kong shares end week near 16-month high, China rallies
* HSI slips 0.3 pct but up 0.7 pct on week
* CSI300 jumps 2.0 percent brings weekly gain to 5 pct
* Materials, banks lead gains ahead of weekend econ data
* PICC sharply higher in HK debut on retail demand
By Vikram Subhedar
HONG KONG, Dec 7 (Reuters) - Hong Kong shares eased slightly on Friday but hovered near their highest since August last year as prospects of a strong recovery in the Chinese economy spurred more inflows into mainland-related equities.
The Hang Seng index fell 0.3 percent to 22,191.2 bringing its weekly gain to 0.7 percent.
In China, the CSI300 of top Shanghai and Shenzhen listings rose 1.5 percent bringing its weekly gain to 5 percent. The Shanghai Composite rose 4.1 percent since last Friday's close.
The rally on mainland indexes helped the China Enterprises index of top Hong Kong-listed mainland firms rise 2.8 percent on the week.
A shift in sentiment on China among foreign investors has prompted a flow of funds into mainland-related assets ranging from stocks to exchange traded funds (ETFs) and offshore yuan-denominated bonds.
"People were gloomier at this time last year, but now, judging from the flows, they seem to be very optimistic and positioning for policy changes next year in China," said Larry Jiang, chief investment strategist at Guotai Junan International Securities.
According to Citigroup and EPFR data, inflows into China-focused ETFs last week amounted to just under $1 billion, and were the bulk of that period's net inflow into Asia.
Large-cap materials and banking stocks led the rally in Chinese shares with cement and steel producers particularly strong in Hong Kong.
Shanxi Coal rose 2.8 percent and was the most actively traded stock on the CSI300 followed by Gree Electric which fell 4.9 percent. Shantui Construction rose 3.3 percent.
China Shenhua's 2.7 percent rise made it the biggest boost on the CSI300. Shenhua shares in Hong Kong moved up 0.8 percent.
Cement producers China National Building Materials and Anhui Conch were among the top gainers on the H-shares index rising 4.4 percent and 2.7 percent respectively.
Trading activity in Hong Kong, which has remained relatively healthy this month, was slightly subdued on the day ahead of U.S. payrolls data that is expected to show a month-over-month drop, largely due to superstorm Sandy.
Shares of insurer PICC Group had a strong trading debut in Hong Kong, rising as much as 7.8 percent as retail investors who missed out on the initial public offering bought the stock.
The gains in Chinese shares came ahead of retail sales and industrial production data over the weekend that is expected to provide more evidence the recovery is gathering pace even as valuations remain cheap.
According to a Credit Suisse analysis that measures price-to-book ratios against return-on-equity, China is the most undervalued market in Asia.
Analysts have become more optimistic on earnings over the past two months and now expect MSCI China constituents to grow earnings by about 9.5 percent over the next 12 months, according to Thomson Reuters I/B/E/S.
In September, which saw the biggest cuts in forecasts in 2-1/2 years, analysts on average expected earnings for the year ahead to grow just 7.4 percent.
A steady improvement in economic data combined with signs that China's new leadership will pursue reforms has lifted the Shanghai Composite up 5.4 percent from its year-low of 1949, hit last week.
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