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SHANGHAI, July 11 (Reuters) - China stocks diverged on Tuesday, with the blue-chip index hitting a fresh 18-month high as investors chased companies with solid fundamentals, while small-caps extended a fall on expectations more equity issuance would soften valuations.
The blue-chip CSI300 index rose 0.5 percent to 3,670.81 points, while the Shanghai Composite Index lost 0.3 percent to 3,203.04 points.
An index tracking 50 blue-chips in Shanghai, dubbed China's "nifty 50" index, rose 0.8 percent to a 20-month high as investors continued to chase blue-chips with solid fundamentals. This follows MSCI's decision to include China's 222 big-caps in its key index.
At the smaller end of town, however, the tech-heavy start-up board index ChiNext lost 1.1 percent following a 1.8 percent slump on Monday, with 12 small-cap stocks tumbling the 10 percent trading limit. Small-caps have weakened after the securities regulator approved more initial public offerings over the weekend.
China's central bank resumed open market operations to inject 40 billion yuan ($5.88 billion) into money market on Tuesday, after abstaining from open market operations during the previous 12 sessions.
The tight liquidity conditions will last for a relatively long time, as the central bank's current moves to maintain stability in the market were only meant to prevent financial risks amid Beijing's concerted campaign to deleverage, Bohai securities analyst Song Yiwei wrote in a report.
Banking and consumer stocks led the advance, while material firms took a breather after recent strong gains amid an industry recovery and a weaker dollar.
Investors are likely to be wary of stocks trading at high levels with a rotation into big-caps extending into other sectors, including cyclical shares, which could mean rising risks amid tight liquidity in the market, Song wrote. ($1 = 6.8051 Chinese yuan) (Reporting by Luoyan Liu and John Ruwitch; Editing by Sam Holmes)