* HSI -1.1 pct, H-shares -1.3 pct, CSI300 +0.4 pct
* Shanghai Composite set for biggest quarterly gain in 3 years
* Shanghai free trade zone "concept" stocks rise after zone launch
* Bourse volumes dim ahead of one-week China holiday
* Weak China flash PMI aggravates HK losses
By Clement Tan
HONG KONG, Sept 30 (Reuters) - China shares inched higher on Monday, outperforming other Asia markets as investors chased strength in retailers ahead of a week-long holiday, with the Shanghai benchmark heading for its biggest quarterly gain in three years.
But Hong Kong markets sank to their lowest in two weeks, hurt by a subpar reading in a private survey on factory activity in the mainland and fears that a U.S. government shutdown seemed increasingly likely.
At midday, the CSI300 of the leading Shanghai and Shenzhen A-share listings was up 0.4 percent, while the Shanghai Composite Index climbed 0.6 percent.
On the quarter, they are up 9.3 and 9.8 percent, respectively -- the best for the Shanghai benchmark since the third quarter in 2010.
The Hang Seng Index sank 1.1 percent to 22,951.5 points, its lowest since Sept. 13. The China Enterprises Index of the top Chinese listings in Hong Kong sank 1.3 percent. If losses hold, this would be their biggest daily loss since Aug. 28.
On the quarter, they are up 10.3 and 11.3 percent, respectively.
Volumes in both Hong Kong and mainland markets were light ahead of a holiday. Hong Kong will be shut Oct. 1, and the mainland Oct. 1-7.
"On a normal day, the A-share market will probably have dipped given the negative surprise from the flash PMI, but this is the eve of a one-week holiday," said Guo Yanling, an analyst with the brokerage firm Shanghai Securities.
Suning Appliance jumped 6.9 percent in Shenzhen and BesTV New Media surged 10 percent in Shanghai after local media fanned hopes that electronic retailers will enjoy positive sales over the week-long Golden Week holiday.
The final HSBC Purchasing Managers' Index (PMI) edged up to 50.2 in September from August's 50.1, although that was well below last week's flash reading of 51.2, with domestic orders proving to be weaker than preliminary estimates suggested.
China's official PMI will be released on Tuesday.
Chinese banks fell in Hong Kong, but rose in the mainland as investors were reassured by a central bank statement on Sunday that it would keep policy steady with timely fine-tuning to cope with economic uncertainties.
"After the holiday, the main focus will be the 3rd plenum policy-setting meeting in November, which will raise expectation of policy support. The central bank statement sets the tone for macro policy," Guo added.
China Merchants Bank rose 1.4 percent in Shanghai, while falling 1.8 percent in Hong Kong.
The mainland banking regulator said loan-to-deposit ratios and other regulatory requirements related to cross-border financing for banks will be adjusted for banks in the Shanghai free trade zone, which was launched on Sunday.
Trade zone-related counters rose. Shanghai Waigaoqiao Free Trade Zone Development jumped 5.5 percent in Shanghai, while Shanghai International Port rose 1.4 percent and Shanghai Airport climbed 2.8 percent.
There were losses, however, for Hongyuan Securities , whose Shenzhen shares tumbled 8.1 percent after the official Shanghai Securities News reported that its general manager and his deputy are being investigated by public security authorities.
Power Assets jumped 3 percent after announcing plans to spin off its Hong Kong electricity business in a deal that could be worth as much as $5 billion before the end of the year, IFR reported on Friday.
Sino-Ocean Land sank 2.8 percent after saying it will issue $808 million worth of new shares to two major shareholders, raising capital for future development projects.