* Shanghai falls 0.6 percent; Hong Kong slips 0.5 percent
* China financial issues lower after recent gains
* Developers slip in Hong Kong on fundraising plans (Updates to midday)
By Jun Ebias and Farah Master
HONG KONG/SHANGHAI, Nov 9 (Reuters) - Shares in Shanghai and Hong Kong were lower by midday on Tuesday, tracking weakness in other Asian markets, while investors in China were cautious ahead of the release of inflation data later this week.
China's central bank surprised markets on Tuesday by auctioning one-year bills in its open market operations at a higher yield than last week. Traders said the move may indicate Beijing would tighten monetary policy sooner than expected to ward off excess liquidity.
The Shanghai Composite Index fell 0.6 percent to 3,141.1, retreating from a seven-month high, with investors wary that higher inflation may spark further monetary tightening.
"This is likely to be a short-term sell off, 3-5 days. The market expects inflation data to exceed 4 percent. In this case, an interest rate rise becomes more likely," said Zhang Yanbing, analyst at Zheshang Securities in Shanghai.
Financials were among the biggest weights on the index with China Merchants Bank Co Ltd down 1.9 percent and Citic Securities Co Ltd 1.5 percent lower.
China Minsheng Banking Corp Ltd, down 0.7 percent, has gained in the last five sessions, prompting investors to take profit.
Shanghai's stock market has soared 18 percent in the past six weeks, boosted by the prospect of hot money entering China's market after the U.S. announced a fresh round of monetary easing.
Traders said investors switching from real estate and bonds into stocks coupled with new QFII licences meant the market was flush with cash.
China's securities regulator has approved four central banks to receive a Qualified Foreign Institutional Investor (QFII) licence allowing them to invest in the Shanghai and Shenzhen stock markets.
"Investors are looking at inflation-related companies such as food and beverage issues, while medicine is another hot focus," Zhang said.
Companies connected to the island resort city of Hainan rallied after reports that the authorities had completed a plan to make the island a duty free shopping area.
Construction company Hainan Expressway Co Ltd jumped to its 10 percent limit, while Hainan based pig breeder Haikou Agriculture & Industry & Trade (Luoniushan) Co Ltd also surged 10 percent.
Turnover eased to 134 billion yuan ($20.1 billion) from 153 billion yuan at midday on Monday. A sustained drop in volume may indicate investors are becoming cautious as to whether the index can sustain its rally to the end of the year.
HK SLIPS AS DEVELOPERS, BANKS FALL
The Hang Seng Index was down 0.45 percent at 24,852.3 by the midday trading break, easing from a 29-month high as investors sold local developers on worries about more share sales from the sector, while a rebound in British lender HSBC Holdings Plc capped losses.
"When you have weak overseas markets, you have to expect a good run to ease," a senior trader in Hong Kong said.
Sino Land Co Ltd dropped 5.9 percent after the developer said it aimed to raise $663 million by selling 305 million shares at HK$16.85 each, representing a 7.82 percent discount to its closing price on Monday.
Sino Land is following rival Hang Lung Properties Ltd, which announced a plan last week to raise HK$10.9 billion from an issue of new shares. Hang Lung was down 1.7 percent.
"Hong Kong properties have risen so much and there is a lot of uncertainty about fundraising," said Danny Yan, who helps manage $400 million at Taifook Asset Management. "There will be more fundraising from the sector."
HSBC was up 1.1 percent on short-covering, rebounding from a 1.6 percent decline on Monday on a downbeat outlook. HSBC's 1 billion euro bond sale also lifted sentiment as it reduced the need to issue shares to raise funds, dealers said.
Chinese banks fell as investors pocketed recent gains. Industrial and Commercial Bank of China Ltd fell 1.7 percent and Bank of China Ltd was down 2.3 percent.
Bank of China also slipped on news that it is considering taking a stake in Portugal's third-largest listed bank Banco BPI SA or its Angolan operation BFA.
SJM Holdings Ltd rose 3 percent after it reported higher earnings.
Rival Sands China Ltd, which released its quarterly results during the midday trading break, was up 4.9 percent. (Editing by Chris Lewis)