(Updates to midday)
* HSI gains 1.9 pct, CSI300 up 0.9 pct
* Investors cover short bets based on euro zone bond support
* HSI set for first outperformance vs China in three months
* Shenzhen financial experiment bolsters non-bank financials
By Clement Tan
June 29 (Reuters) - Hong Kong shares outperformed Asian peers at midday on Friday, with investors covering short bets after euro zone leaders unexpectedly agreed to take action to bring down Italy's and Spain's spiralling borrowing costs.
European leaders also agreed to create a single supervisory body for euro zone banks and to allow them to be recapitalised directly by the currency area's rescue fund without adding to government debt.
The Hang Seng Index rose 1.9 percent to 19,387.1, with its 200-day moving average at 19,556.3, a chart level that has capped gains since mid-May, seen providing near-term resistance.
In the mainland, the Shanghai Composite Index gained 0.7 percent, returning to positive territory for the year after it slipped into the red on Thursday. The large cap-focused CSI300 Index gained 0.9 percent.
"It's difficult for fund managers at the end of this month and quarter," said Alan Lam, Julius Baer's Hong Kong-based Greater China equity strategist.
"They are eager to lock in profits, but they are also looking to 'clean up' their portfolio and accumulate quality names, particularly ahead of the next earnings season that starts towards the end of July," Lam added.
Europe's largest bank, HSBC Holdings Plc, was the Hang Seng Index's top boost, up 1.2 percent. Shares of other companies with a sizable European-focus also rose, with Hutchison Whampoa up 2.7 percent.
Chinese banks, which have been underperforming the broader market this year, were also strong. Industrial and Commercial Bank of China (ICBC) gained 2.2 percent in Hong Kong and 0.8 percent in Shanghai.
Non-bank financials were also bolstered after China unveiled tax and financial measures on Friday to create an experimental zone in the southern boomtown of Shenzhen aimed at boosting international use of its currency and links with Hong Kong.
Citic Securities gained 2.2 percent in Shanghai and 1.9 percent in Hong Kong, while Hong Kong banking play Bank of East Asia jumped 3.9 percent.
ONSHORE CHINESE MARKETS UNDERPERFORM
After outperforming Hong Kong in the last two months, mainland Chinese markets have underperformed in June. The Hang Seng Index is set to record its best monthly performance since January, up 4.2 percent.
Both the Shanghai Composite and the CSI300 are down 7 percent in June, with onshore investors sceptical on the state of the Chinese economy despite an interest rate cut this month and talk of another reserve requirement reduction.
On Friday, China's National Bureau of Statistics said the country's industrial profits fell for the second straight month in May as the world's No 2 economy slows on slackening domestic and external demand.
Data due over the weekend is expected to show that activity at China's factories fell to seven-month lows in June. That would compound market concerns that the economy is stuck in a deeper and longer downturn than anticipated. (Editing by Richard Borsuk)
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