(Corrects headline to say soft China factory inflation, not factory data)
SHANGHAI, June 12 (Reuters) - China and Hong Kong stocks dropped on Wednesday as weak factory inflation data from Beijing and the prospects of an escalation in the Sino-U.S. trade spat curbed risk appetite. ** The CSI300 index was down 0.8% at 3,690.13 points at the end of the morning session, while the Shanghai Composite Index lost 0.6% to 2,909.07 points. ** The Hang Seng index dropped 1.6% to 27,348.52 points, while the Hong Kong China Enterprises Index lost 1.1% to 10,498.73. ** China’s factory gate inflation slowed amid sluggish commodity demand and faltering manufacturing activity, reinforcing economic growth worries.
** In a sign that trade tensions could intensify, U.S. President Donald Trump on Tuesday defended the use of tariffs as part of his trade strategy while China vowed a tough response if the United States insists on escalating trade tensions.
** Shares of real estate companies in China dropped after the Chinese city of Enshi made moves to stabilize property prices and triggered worries over the sector’s health.
** Bucking broader market weakness, China’s rare earth stocks jumped after news that China launched a survey of rare earth resources in seven regions on Monday, amid speculation that Beijing may curb exports of the materials to the United States.
** Chengdu Galaxy Magnets Co Ltd, Yantai Zhenghai Magnetic Material Co Ltd and Jl Mag Rare-Earth Co Ltd led the gains.
** Major rare earth producers including China Northern Rare Earth Group High-Tech Co Ltd, China Minmetals Rare Earth Co Ltd, Xiamen Tungsten Co Ltd, Rising Nonferrous Metals Share Co Ltd and Shenghe Resources Holding Co Ltd also gained.
Reporting by Samuel Shen and John Ruwitch, Editing by Sherry Jacob-Phillips