Hong Kong shares rose to a two-month high and Shanghai's benchmark inched back towards stubborn chart resistance on Thursday, with financial shares leadomg gains on hopes of further policy easing in China.

Investors covering short-positions ahead of the long Lunar New Year holiday next week also helped boost turnover in Hong Kong rise to its highest in more than six weeks.

A rally across Asian markets underpinned by a forecast-beating earnings report from Goldman Sachs Group Inc and a plan by the International Monetary Fund to raise more money to help countries hit by Europe's debt crisis also lifted sentiment, traders said.

The Hang Seng Index closed up 1.3 percent at just below 19,943 points, within touching distance of the 20,000-mark which had proved a stiff resistance level in October and November last year.

The Shanghai Composite Index also rose 1.3 percent to 2,296.08, moving back towards the 2,300 level at which it stumbled last week.

Developers in Hong Kong had a strong day, led by Hang Lung Properties which surged 9.7 percent after reporting strong profit on the back of growing China business.

Financial shares, in particular insurers, were key drivers for the Hong Kong benchmark, partly on expectations that any boost in Chinese asset prices will lift their investment income.

It's all price appreciation of their A-share portfolios, said a trader at an Asian brokerage in Hong Kong.

They're an asset portfolio play because of their exposure to Chinese assets, said the trader.

Ping An shares rose 7 percent in strong volume, and have gained 27 percent since hitting a three-month intraday low on Jan. 9. Larger rival China Life Insurance, up 2.8 percent on the day, has risen nearly 16 percent over the past two weeks.

Along with synthetic exchange-traded funds such as the iShares China A50 and Chinese banking shares, shares of Chinese insurers are often considered proxies for domestic mainland markets which remain largely closed to foreign investors.

China's domestic stock markets, among the worst performers in Asia for the last two years running, have posted impressive gains so far in 2012.

The Shanghai Composite Index is up more than 7 percent since hitting a 2-1/2 year intraday low on Jan 6, with gains fueled by expectations that Beijing would start easing monetary policy soon to shore up cooling economic growth and take more steps to support the domestic stock market.

China's local governments could plough up to $57 billion into the domestic stock market under a proposal to allow them to allocate some of their pension funds into shares, sources told Reuters on Thursday.

Ping An shares in Shanghai rose 2.8 percent although the biggest boost came from large-cap banks such as ICBC, which closed up 1.2 percent.

CASH IN THE SYSTEM

The People's Bank of China has injected cash into the financial system this week, largely to ease a liquidity crunch ahead of the Lunar New year holiday next week, while expectations have grown that a cut in bank reserve requirements is imminent.

Analysts at Credit Suisse remain wary of the extent of likely policy easing, particularly since the authorities are unlikely to loosen their grip on the property sector and as inflation remains a focus.

The market accepts that property prices have to drop, but is not certain how this drop will affect the national economy and the banking system, said Vincent Chan, head of China Research in a note to clients.

If the national economy and banking system hold up well during this phase, then it actually could remove an overhang on the Chinese market, said Chan, who projected a 10 to 25 percent move higher for Chinese shares in Hong Kong and Shanghai, respectively, through the end of the year.

Bucking the broader move higher, telecom equipment maker ZTE Corp shares were hammered, ending the day down 7.2 percent in over 10 times their average 30-day traded volume.

The reason for the slump was unclear, with traders citing talk that the company had suffered a setback in a lawsuit with Ericsson and also that sanctions on Iran would hurt ZTE's operations there.

A ZTE executive told Reuters outcome of the lawsuit was not out yet.