Hong Kong shares at highest since May 15, China weak

China's domestic benchmarks ended lower - underperforming the rest of Asia - with the Shanghai Composite down 1.2 percent and large-cap focused CSI300 off 1.4 percent. Both are now less than half a percentage point from a 2012 low.

The Hang Seng index recovered from early losses to end the day up 0.5 percent, which traders said was largely due to short-covering in the afternoon. An index of top Hong Kong-listed Chinese firms rose 0.2 percent.

On the mainland markets, lower commodity prices hit shares in the energy and materials sectors while sluggish market performance weighed on shares of top retail brokerages Citic Securities and Haitong Securities.

Most investors had hoped the domestic economy would bottom out in June but data, such as PMI, suggest that may not be the case, said Chen Yi, analyst at Xiangcai Securities in Shanghai, referring to the purchasing managers' index.

There are worries over next week's economic data.

China next week will announce the second quarter growth rate, which analysts expect to show the economy to have cooled for a sixth successive period.

Citic shares in Shanghai fell 2.7 percent making them the second-biggest drag on the benchmarks behind Sinopec , which dropped 2.4 percent. Citic shares in Hong Kong fell 1.4 percent on worries that the weak market would curb appetites among China's retail investors.

Trading activity was particularly subdued in Hong Kong where turnover fell to its lowest level since 2012's first day of trading as investors awaited central bank policy decisions from Europe later on Thursday and U.S. payrolls data on Friday.

The ECB is widely expected to cut its main interest rate to a record low and may also restart its purchase of euro zone bonds to push down borrowing costs and inject more funds into the financial system.

With volume so light, a significant short squeeze in blue-chip index stocks was forcing the market higher, said a trader at an U.S. brokerage in Hong Kong, adding that the U.S. holiday on Wednesday had resulted in fewer overnight orders.

Local investors were seen parking money in defensive heavyweights such as utilities, telecoms and Hong Kong large-caps that were among the few stocks that saw gains on relatively healthy volumes.

China Unicom, whose shares have lagged those of larger rival China Mobile this year, rose 2.7 percent. Cheung Kong Holdings gained 1.4 percent while power utility CLP Holdings closed up 1.3 percent.

LI NING JUMPS

Chinese sportswear brand Li Ning, which was near a seven-year low last Friday, rose 7.3 percent. The company, which just made senior management changes, bucked the day's trend of weaker volume, with trading at more than three times its daily average over 30 days.

The company, which has struggled with weak sales and high marketing costs, saw shares hit a near 7-year low last month and over June significantly lagged the Hang Seng index.

Short-sellers piled into the stock with nearly 60 percent of the shares available to be lent out on loan as of late June, according to Markit Securities Finance. Traders said some bearish bets were covered this, week helping the stock rise almost 16 percent since last Friday.

Analysts remain bearish on the outlook for Li Ning with 13 of them slashing their 2012 earnings expectations by an average 39.7 percent over the past month, according to Thomson Reuters StarMine.

Chinese sportswear brands have lost out to international competition from Nike and Adidas, which have gained market share in China.

Shares of PC maker Lenovo recovered slightly from losses over the past two days and ended up 0.7 percent following reports in Japanese media that it was planning to develop tablet computers with Japan's NEC Corp.