* SSEC +0.3 pct, CSI300 +0.4 pct, HSI -0.5 pct
* China March factory activity grows fastest in nearly 5 years-official PMI
SHANGHAI, March 31 (Reuters) - China stocks edged higher on Friday morning, set to snap a four-day losing streak, with better-than-expected economic data lifting sentiment but gains were capped as liquidity concerns kept investors in check.
Hong Kong joined an Asia-wide decline, with no support of southbound inflows and investors balanced positions on the last day of the month and quarter.
China stocks erased initial weakness and eked out marginal gains by the lunch break. The CSI300 index rose 0.4 percent, to 3,450.65, while the Shanghai Composite Index gained 0.3 percent, to 3,219.40.
The blue-chips has lost 1.1 percent so far this week and gained 4.3 percent this quarter.
Activity in China's manufacturing sector expanded at the fastest pace in nearly 5 years in March, beating expectations, an official survey showed on Friday.
"Of course it's a good thing," said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities.
Yip noted investors had gradually turned their attention back to fundamentals after U.S. President Donald Trump encountered setbacks to pass the healthcare bill, casting doubt on his ability to deliver on the promises of tax cuts and infrastructure spending.
"Generally China's still on track for recovery but we still need to wait-and-see how sustainable the momentum will be."
But liquidity concerns curbed investors' appetite for risky assets, as China's central bank skipped open market operation for a sixth day on Friday and would drain 290 billion yuan ($42.05 billion) for the week.
The cost of borrowing short-term cash against bonds at China's stock exchanges more than tripled to as much as 32 percent on Thursday as smaller financial institutions scrambled for funds before a central bank health-check on the banking industry.
It's a mixed day in the mainland markets.
A gauge of transportation plays lost 1.2 percent at the lunch break, as China's weakening yuan cut $1.6 billion from profits earned by the country's three largest airlines last year.
Investors piled up defences stocks as U.S. President Donald Trump foreshadowed a tense meeting with Chinese President Xi Jinping next week by tweeting on Thursday that the United States could no longer tolerate massive trade deficits and job losses.
Also supporting the sentiment, China's domestically developed AG600, the world's largest amphibious aircraft, will make its maiden flight in late May.
An index tracking defences plays rallied 1.9 percent at midday.
The mainland stock markets will be closed for two days starting next Monday.
In Hong Kong, the Hang Seng index dropped 0.5 percent, to 24,183.92, while the Hong Kong China Enterprises Index lost 0.6 percent, to 10,294.10.
The market has lost 0.7 percent for the week and gained 10 percent for the quarter.
Most sectors lost ground, led by services stocks.
Southbound trading between mainland cities and Hong Kong through connect schemes was suspended until April 5.
($1 = 6.8966 Chinese yuan renminbi)
Reporting by Jackie Cai and John Ruwitch