China, Hong Kong stocks drop as policy tightening fears weigh

* SSEC -0.3%, CSI300 -0.8%, HSI -0.9%

* HK->Shanghai Connect daily quota used 6.5%, Shanghai->HK daily quota used 1.9%

* FTSE China A50 -0.5%

SHANGHAI, Feb 19 (Reuters) - China and Hong Kong stocks dropped on Friday, as investors fret over liquidity conditions following a report that the China central bank was focusing more on money market interest rates than the size of its operations.

** The CSI300 index was down 0.8% at 5,724.10 points at the end of the morning session, while the Shanghai Composite Index lost 0.3% to 3,663.74 points.

** The Hang Seng index dropped 0.9% to 30,335.51 points, while the Hong Kong China Enterprises Index lost 0.7% to 11,960.62.

** For the holiday-shortened week, CSI300 shed 1.4%, while SSEC added 0.2%.

** HSI was up 0.5% for the week, while HSCE gained 0.7%.

** With 100 billion yuan ($15.45 billion) worth of reverse repos maturing on Friday, China’s central bank drained a net 80 billion yuan on the day.

** The People’s Bank of China (PBOC) has achieved its goal of maintaining the stability of money market interest rates around the Lunar New Year holiday with measured, targeted open market operations, the central bank publication Financial News said in a commentary published on Thursday.

** The PBOC rolled over maturing medium-term loans earlier on Thursday, but drained 260 billion yuan worth of short-term liquidity on a net basis as a result of maturing reverse repos on the day.

** “Basically PBOC would start to drain liquidity sooner than the U.S. Fed, while there are already expectations of a rise in domestic interest rate,” said Jin Jing, an analyst with Caitong Securities.

** Investors could start to rebalance their allocations, shifting out of expensive stocks towards cyclical players with low valuations that would benefit from an economic recovery, Jin added.

** Other Asian markets also weakened on rising bond yields.

** Around the region, MSCI’s Asia ex-Japan stock index was weaker by 1.22% while Japan’s Nikkei index was down 1.22%.

** Core bond yields have pushed higher globally led by the so-called “reflation trade” where investors wager on a pick-up in growth and inflation.

$1 = 6.4713 Chinese yuan Reporting by Luoyan Liu and Brenda Goh, Editing by Sherry Jacob-Phillips