(REUTERS) -- Hong Kong and Shanghai shares rose on Friday, achieving a second straight week of gains and managing to break above stubborn chart resistances on hopes of policy easing inChina and on stronger overseas markets.

The gains rounded off a strong last two weeks of the Year of Rabbit for both markets. These were fed by expectations of pro-growth policies from China during the Year of the Dragon, which begins on Monday.

On Friday, the combination of good earnings results from U.S. banks and reduced concerns over Europe lifted investor appetite for risky assets.

The Hang Seng Index finished up 0.8 percent at a 3-1/2 month high and back above the 20,000 level for the first time since October 28. The Shanghai Composite finished 1 percent higher at 2,319.12, closing above 2,300 for the first time since Dec. 9.

Mainland markets will remain shut all of next week while Hong Kong will be closed from Monday through Wednesday.

Stocks hit a bump mid-morning on Friday after an indicator signaled a sluggish start to 2012 for Chinese manufacturers. Factory activity likely fell for a third successive month in January, an HSBC survey of purchasing managers showed.

But strength in Europe-sensitive names in Hong Kong helped the Hang Seng recover after the midday break.

Feels a little like the calm after the storm, with markets generally subdued after their powerful run over the past fortnight, said a Hong Kong-based trader at a large U.S. brokerage.

While clients were not very keen to add risk ahead of next week's holidays, flows were well above recent averages, said the trader, suggesting investors were not completely on the sidelines as generally tends to happen ahead of long holidays.

Turnover on Hong Kong exchange was HK$70 billion, slightly lower than Thursday's but more than 50 percent higher than the average over the past month.

A large chunk of the equity fund inflows into Asia ex-Japan during the week ending Jan. 18 went into China-focused funds, according to Markus Rosgen, regional equity strategist at Citigroup.

About $622 million was ploughed into China funds, said Rosgen in a note to clients, citing data from fund tracker EPFR Global.

That comes as risky assets around the globe see renewed buying interest.

Eased concerns over the cost of fundraising for European countries, and strong earnings from U.S. banks helped HSBC Holdings Plc rise 3.7 percent to a 3-1/2 month high, the biggest boost on the Hang Seng Index.

Europe-focused retailer Esprit Holdings Ltd 0330.HK rose 1.6 percent, while Prada SpA 1913.HK gained 4.6 percent.

Weighing on the index, locally listed Chinese companies saw profit-taking after a strong week, and ahead of the long holiday, during which a slew of U.S. companies are expected to release results and the Federal Reserve will announce its latest policy decision.

Industrial & Commercial Bank of China Ltd was down 1.1 percent on Friday, but still gained 14 percent since Jan. 9. Ping An Insurance (Group) Co of China Ltd, which slipped 0.8 percent on the day, rose 22 percent over the same period.

In Shanghai, mining companies saw the sharpest losses after the private manufacturing index was released. Zhongjin Gold Corp Ltd lost 2.3 percent, while Minmetals Development Co Ltd fell 1.7 percent.

Outside of large caps, Winsway Coking Coal Co Ltd took another hit, down 5.8 percent as it battles allegations of fraud.

The company, which has lost about 13 percent since Wednesday's close, has dismissed the allegations.