* China shares headed for fourth straight weekly loss
* BOC, BOC Hong Kong outperform after H1 earnings
* China Vanke continues slide on new share issue (Updates to midday)
By Parvathy Ullatil & Claire Zhang
HONG KONG, Aug 28 (Reuters) - China shares were down 2.5 percent by midday Friday, knocking Hong Kong shares off their firm start, as banks fell on reports that August lending on the mainland had shrunk, trimming liquidity flowing into the market.
Local media reported that new loans extended in August by China's four biggest state-owned banks slowed sharply from July. The four, including Industrial and Commercial Bank of China, typically account for more than 50 percent of lending.
"The market now expects new lending in August by all banks will be at most a little more than 200 billion yuan," said analyst Cao Xuefeng at Western Securities in Chengdu. "The market is also jittery about huge fund-raising activities."
The lending estimate compares with an average monthly total of more than 1 trillion yuan in the first half of this year.
FOURTH STRAIGHT WEEKLY DROP
The Shanghai Composite Index fell 72.121 points to 2,874.274, also hurt by a recent series of announcements of new share supply, including a $1.6 billion additional offer by property developer China Vanke announced on Thursday.
Losing Shanghai A shares outnumbered gainers by 806 to 121 while the turnover for Shanghai A shares edged down to 73.3 billion yuan ($10.7 billion) from Thursday morning's 76.8 billion yuan.
Vanke tumbled 3.3 percent to 10.35 yuan by midday, extending losses after revealing plans for a new public share offer to fund residential property projects as China's real estate market rebounds.
Minsheng Bank, China's first private-sector bank, dropped 5 percent to 6.44 yuan and was the morning's most active stock. It plans to float shares in Hong Kong which, while not directly related to its Shanghai-listed shares, would dilute its earnings once implemented.
The index is heading for a nearly 3 percent weekly loss, its fourth successive weekly loss, but has shown some signs of stabilising. It lost 0.7 percent on Thursday but has generally held to a relatively narrow range this week in the wake of a 20 percent loss in the two weeks up to the middle of last week.
Analysts expect the index generally to move in a narrow range between 2,800 and 3,000 points in the near term.
Oil refiners were hit hard for second day as state-regulated domestic fuel prices remained unchanged despite surging global prices, disappointing market expectations that they would be raised.
Top refiner Sinopec Corp slid 4.3 percent to 12.49 yuan, while PetroChina, the most heavily weighted stock in the index, sagged 2.2 percent to 13.69 yuan, ahead of its first half earnings due on Friday.
BOC, BOC HONG KONG BUCK TREND
By midday, the benchmark Hang Seng Index was 0.5 percent lower at 20,144.32.
The China Enterprises Index, which represents top locally listed mainland Chinese stocks, was down 0.9 percent at 11,472.16.
China Life dropped 2.1 percent, tracking the downturn in mainland bourses as investors continued to fret about a likely drying up of the liquidity that has driven the sharp rally in that market.
"It's clear the central government wants to control credit to make sure the money the banks are lending is not being used to speculate in the market. And that is the major direction for all its policies," said Patrick Shum, president at BMI Funds Management.
Analysts see little upward momentum on the benchmark index as daily turnover continues to dwindle, staying below HK$60 billion for most of this week, compared with HK$80 billion clocked early in August.
Bank of China dodged the downdraft to climb 0.8 percent after the country's biggest foreign exchange lender posted a forecast-beating 10 percent rise in second-quarter profit.
Its unit BOC Hong Kong jumped 6.1 percent to HK$16.04, after posting a lower-than-expected 5.6 percent drop in interim earnings, helped by strong fee income as the stock market boomed during the period.
Citigroup raised its target price on the stock to HK$18 from HK$16.50 as its expects the bank to be a major beneficiary of increased capital infows into Hong Kong and China and the ongoing recovery in the local property sector.
China Telecom Corp jumped 3.9 percent after the 30 percent drop in its quarterly profit beat analysts' low expectations, as revenue from the wireless business grew.
"We underestimated China Telecom's ability to simultaneously handle a large deteriorating wireline revenue base and a challenging subscale CDMA business," said analysts with Bank of America-Merrill Lynch while upgrading the stock to "neutral" from "underperform". (Editing by Edmund Klamann and Chris Lewis)