SHANGHAI, July 8 (Reuters) - China and Hong Kong stocks rose on Friday, lifted by stimulus hopes from Beijing, but mainland markets were set to snap a five-week rising streak amid COVID-19 flare-ups and geopolitical tensions.

** China's blue-chip CSI300 Index rose 0.2% by the lunch break, while the Shanghai Composite Index also edged up 0.2%. Both the indexes are poised to post their first weekly loss in six as the rebound appears to be losing steam.

** In Hong Kong, the benchmark Hang Seng Index rose 0.1%. For the month, the index is set to fall roughly 0.9%.

** Sentiment was aided by a Bloomberg report that China's Ministry of Finance was considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds in the second half of this year to boost infrastructure funding.

** "This move, if confirmed, is positive," Nomura Chief China Economist Ting Lu wrote in a note.

** "However, we point out that it could just be another policy step to fill the vast funding gap as a consequence of sharply falling fiscal revenue and land sales."

** Morgan Stanley said in a note that sentiment in China shares dropped notably in the past week.

** "Investors remain alert to domestic COVID-19 flare-ups, as the economy is still at an early stage of a bumpy recovery trajectory."

** Also limiting gains were signs of lingering Sino-U.S. tensions. A senior Chinese military officer warned his U.S. counterpart on Thursday that any "arbitrary provocations" would be met with a "firm counterstrike" by China.

** China's transport, infrastructure and property shares rose, but steel and energy stocks fell.

** Shares of companies producing materials used in protection vests, including Jihua Group, Wanwei Hi-tech and Yantai Tayho Advanced Materials Co shot up on news that Japan ex-prime minister Shinzo Abe had been taken to a hospital after apparent shooting. (Reporting by Shanghai Newsroom; editing by Uttaresh.V)