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* HSI -0.4 pct, H-shares -0.3 pct, CSI300 -1.1 pct
* H-shares set for 4th monthly gain, A-shares headed for dim October
* China banks sink after ICBC, BoCom earnings underwhelm
* China property jumps, relief that price measures stay supply side
By Clement Tan
HONG KONG, Oct 31 (Reuters) - Hong Kong and China shares fell from one-week highs by midday on Thursday, with the Chinese banking sector on the defensive following disappointing quarterly earnings from two of the "Big Four" lenders.
Losses on the day trimmed October gains for Hong Kong while sending mainland Chinese indexes into negative territory for the month ahead of China's official October manufacturing purchasing managers index reading on Friday.
"This batch of earnings is going to give China bears more ammunition, doing little to curb the huge divergence of views on the sector," said Larry Jiang, chief investment strategist at Guotai Junan International Securities.
At midday, the Hang Seng Index, which closed on Wednesday at its highest since Oct. 22, was down 0.4 percent at 23,211.6 points. The China Enterprises Index of the top Chinese listings in Hong Kong was down 0.3 percent.
On the month, they are up 1.5 and 2.8 percent, respectively. For the H-share index, this will likely be its fourth-straight monthly gain, but it has struggled at a key technical level at its 200-day moving average for much of October.
The CSI300 of the leading Shanghai and Shenzhen A-share listings sank 1.1 percent, while the Shanghai Composite Index shed 0.7 percent. Both had closed on Wednesday at their highest in five sessions.
The indexes are down 1.2 and 1.3 percent, respectively, and set for their first monthly losses in at least a quarter.
On Thursday, gains for the Chinese property sector helped limit index losses. Poly Real Estate jumped 3.4 percent in Shanghai, while Shimao Property spiked 4.1 percent in Hong Kong.
China President Xi Jinping said late on Wednesday that the country will increase the supply of land for homes and spend more on affordable housing projects as the government steps up efforts to stabilise a red-hot property market.
His comments spawned some relief that the central government is sticking to supply-side measures for now, seen less detrimental for the sector's profitability than demand-side measures that Xi's predecessors favoured.
A slew of Chinese banks reported quarterly earnings after markets shut on Wednesday, which Barclays banking analyst May Yan described as divergent with the two biggest sector players underwhelming expectations.
Losses came in spite of easing money rates in the mainland, which had been a source of concern since late last week.
Industrial and Commercial Bank of China (ICBC) slid 1.7 percent in Hong Kong and 0.3 percent in Shanghai after the country's largest lender followed China Construction Bank (CCB) in missing expectations with a 7.6 percent rise in third quarter net profit from a year ago.
The best performers this quarter, according to Barclays' Yan, were Agricultural Bank of China and mid-sized China Citic Bank , while Bank of Communications and Minsheng Bank were the worst.
Thinning loan margins and rising bad loans as the country's economy slows from the supercharged pace of the last decade were all cited as factors for the declining profitability of the Chinese banking sector.
Despite still ranking among the world' most profitable banks, raking in an average 13 percent profit growth in the third quarter, the Chinese banking sector has been among the most under owned despite trading at low valuations.
"In the short term, there are plenty of other macro uncertainties that will drive the market. But this earnings season will guide investors towards the better Chinese banking names," Guotai's Jiang said.
"Some money is going to still have to rotate into Chinese banks towards the end of the year simply because investors will have to take profit on the outperformers and low valuations make Chinese banks a cheap place to park for a while," Jiang added.