Hong Kong shares bounced back after two days of losses on Wednesday as stronger overseas markets and a turnaround in the mainland bourses, led by the property sector, spurred some short-covering.

In Shanghai, shares of real estate developers rallied, partly on expectations that falling home prices will stimulate sales and also open the way for more policy easing. That helped push the benchmark stock index up 2 percent on the day.

The Hang Seng index ended the day up 1.1 percent, little changed from its midday close, and managed to recover losses from the past two sessions. The China Enterprises index of top locally listed mainland firms rose 1 percent.

HSBC Holdings rose 1.9 percent as worries about Spanish debt receded after Madrid sold a more-than-planned 3.2 billion euros ($4.21 billion) of 12- and 18-month bills on Tuesday due to good demand from domestic banks.

Early on Wednesday, data published by China's National Bureau of Statistics showed average new home prices fell last month from a year earlier, the first decline in two years, raising investors' hopes that policies in place to cool the property sector may soon be eased.

Hopes that lower home prices would spur sales also helped sentiment towards the sector, the focus of the government's efforts to rein in prices.

Falling house prices show that the government's tightening property policies are coming into effect and that some broader easing may follow in the near term, said Zhang Gang, senior analyst at Central Securities in Shanghai.

While the property sector is unlikely to see much easing analysts say moves such as easier loans to small- and medium-enterprises or cuts in banks' reserve requirements were possible along with interest rate reforms.

Chinese property developers reversed earlier losses, with a sector sub-index in Shanghai up 3.1 percent.

Shenzhen-listed China Vanke rose 3.2 percent while Poly Real Estate rose 4.7 percent.

SHORT-COVERING

Traders also attributed the rally to a report that a Chinese government researcher expects economic growth to accelerate in the second-half as inflation cools and, to a lesser extent, to news that South Korea's central bank would buy $300 million in Chinese stocks over the next three months.

Those comments are certainly drivers, said a Hong Kong-based trader at an American brokerage.

Besides, abundant liquidity has given A-shares good support recently. You can see repo rates are falling again today, said the trader, pointing to the seven-day bond repo rate considered a barometer of cash in the financial system and driver for mainland stock markets.

The rate, currently at 3.5 percent, is down from a six-week peak of 4.2 percent on April 6.

In Hong Kong, where short-selling has remained above the average 8 percent level, some bearish bets were covered following the biggest gains on Wall Street in a month on Tuesday and a better-than-expected Spanish debt auction.

Petrochina shares rose 2.4 percent, providing the biggest boost to the benchmark of China shares in Hong Kong .

Chinese banking shares also held on to gains with ICBC up 0.6 percent after two days of weakness.

Most Chinese banks are expected to report first-quarter results next week. Analysts at Citigroup expect the earnings growth for the sector to slow markedly year-over-year due to slower net-interest margin expansion.

Net interest margins, a key metric to measure profitability of banks, are likely to decline across the board, reflecting a peaking of loan pricing and continued demand for deposits, Citi analysts Simon Ho and Paddy Ran said in a note.