* HK shares up in thin volume, Hang Seng Bank firm
* HK stocks tracking U.S. stocks, correlation strengthens
* China liquidity crunch weighs on Shanghai stocks (Adds details, quotes)
By Kelvin Soh and Farah Master
HONG KONG/SHANGHAI, Dec 1 (Reuters) - Shares in Shanghai and Hong Kong rose in thin trade on Wednesday, with a cash squeeze in China and fund flows out of the territory prompting risk adverse investors to avoid taking large positions.
The benchmark Hang Seng Index closed up 1.05 percent at 23,249, while the China Enterprise Index of top locally listed mainland stocks closed 1.03 percent higher at 12,949.
"We're probably beginning to attract some bargain hunters now," said Patrick Yiu, an associate director at CASH Asset Management. "The Hong Kong dollar's weakness points to capital outflows, but this may improve as the index is now trading above its 10-day moving average."
The Hong Kong dollar hovered around two-month lows on Wednesday, as investor worries about the European debt crisis, China's plans to curb inflation, and political tensions on the Korean peninsula.
Volume was thin with 1.6 billion shares changing hands, about a fifth lower than the average turnover of 1.9 billion shares seen in November as funds consolidated their positions ahead of the year-end.
The spread between the lower and upper Bollinger Bands also hovered around one-year highs, pointing to a period of high volatility that could attract options and implied volatility trades.
The correlation between Hong Kong stocks and the S&P 500 index also strengthened to 0.84 on Wednesday, suggesting that investors are looking to U.S. stocks for direction. A value of 1 is a perfect correlation.
Hang Seng Bank rose 1.6 percent after CCBI Securities analyst Paul Schulte said investors should buy into banks with low loan-to-deposit (LDR) ratios. Hang Seng has an LDR of 52 percent.
MINISCULE VOLUME IN SHANGHAI
The Shanghai Composite Index closed up 0.1 percent at 2,823.4 after slumping on Tuesday, with a liquidity crunch in the domestic money market weighing on the stock market. [ID:nTOE6AT04N]
The index dropped more than 5 percent in November, compared with a 12 percent gain in October.
Analysts said the index had solid support at its 125-day moving average at 2,698 points. Firm resistance was seen at the 250-day moving average at 2,877 points, a mark the index plunged from on Tuesday.
Speculative retail investors, who make up two-thirds of turnover, continued to focus on policy measures, avoiding active buying of heavily weighted commodity, banking and transportation issues, sectors considered vulnerable in a policy tightening environment.
"Investor expectations for a rise in interest rates are persistently fierce. Additionally, the authorities moves to control agricultural prices are having an impact on the market," said Zhang Gang, analyst at Central Securities in Shanghai.
Mainland factories ramped up production in November, but a big jump in input prices pointed to more inflationary pressure in the pipeline and a need for more monetary tightening, two surveys showed on Wednesday. [ID:nTOE6B001C]
Volume slumped back to levels seen in November's lacklustre trading month. Turnover of Shanghai A shares dropped to 104 billion yuan ($15.60 billion) from 172 billion yuan on Tuesday.
Oil major Sinopec , the biggest weight in the index, dropped 0.6 percent. SAIC Motor fell 1.2 percent. China Shenhua Energy , the world's most valuable coal producer, dropped 0.3 percent.
Banks, which were a target of heavy selling in November, were mixed with Industrial and Commercial Bank of China (ICBC) up 2.1 percent, while Bank of China gained 0.3 percent. China Everbright Bank and China Minsheng Bank were both flat.
($1=6.668 Yuan) ASIA-PACIFIC MARKETS Pan-Asia...... Japan........ S.Korea.... S.E. Asia............ Hong Kong... Taiwan..... Australia/NZ......... India....... China...... OTHER MARKETS: Wall Street.......... Gold......... Currency.. Eurostocks.......... Oil........... JP bonds... ADR Report......... LME metals.. US bonds... Stocks News US.. Stocks News Europe... DIARIES & DATA: IPO diary & data Asia earnings diary U.S. earnings diary European diary Taiwan diary Wall Street Week Ahead Eurostocks Week Ahead World forecasts
TOP NEWS: For top Asian company news, double click on: U.S. company news European company news Forex news Global Economy news Technology news Telecoms news Media news Banking news Politics/General news Asia Macro data A multimedia version of Reuters Top News is available at: -- http://topnews.session.rservices.com LIVE PRICES & DATA: World Stocks <0#.INDEX> Currency rates Dow Jones/NASDAQ Nikkei FTSE 100 Debt <0#USBMK=> Hong Kong Dollar LME price overview