SHANGHAI, June 9 (Reuters) - China's blue-chip index were on track to close at a 17-month high on Friday despite producer price data suggesting a broader economic slowdown, as funds switched from small-caps to the "Nifty Fifty" due to tightening liquidity.
The blue-chip CSI300 index rose 0.4 percent, to 3,575.89 points by the lunch break, and was set for its best weekly performance in six months, with a gain of 2.6 percent.
The Shanghai Composite Index gained 0.1 percent, to 3,152.45 points.
Underscoring diverging fortunes, the SSE50 Index - dubbed China's "Nifty Fifty" index - jumped 0.6 percent to 17-month highs. In contrast, the start-up board ChiNext lost 0.4 percent, struggling near 2 1/2 year lows.
The economy is under pressure from rising financial costs as Beijing steps up deleveraging, hurting smaller firms most.
Chinese lenders are scrambling to raise cash ahead of the mid-year health check by the central bank, pushing up deposit rates and yields of wealth management products, local media reported. Higher funding costs are likely to push up lending rates.
In a another sign of liquidity tightness, China's one-year treasury yields exceeded 10-year treasury yields on Thursday, an unusual phenomenon last seen in June, 2013.
That liquidity tightness was a factor driving funds out of small-caps and into blue-chips, better equipped to handle an economic slowdown, signalled by producer price inflation easing for a third straight month.
"In a slowing economy, investors are buying big caps for their earnings quality, visibility and cash flow," Hong Hao, head of research at BOCOM International, wrote in a report on Friday.
Hong Kong stocks dipped, after repeatedly hitting 23-month highs recently, with sentiment curbed by uncertainly stemming from the outcome of the UK election, as well as major risk events in the United States and Europe.
The Hang Seng index dropped 0.3 percent, to 25,999.20 points, while the Hong Kong China Enterprises Index lost 0.7 percent, to 10,581.15.
An index tracking Chinese property developers dropped over 2 percent, correcting after rapid recent gains.
"With the latest surge in the Hang Seng, our allocation model suggests that it is rapidly losing its appeal," BOCOM International's Hong said.
"While it is likely to push new highs, the easiest gains seem to be already in the bag."
Reporting by Samuel Shen and John Ruwitch; Editing by Simon Cameron-Moore