China shares rose on Wednesday, led by strength in beaten down material names, with speculation rife that Beijing might loosen policy after Premier Wen Jiabao pledged to maintain appropriate credit growth.

Many market watchers now expect the government to begin easing its tight liquidity policy in the fourth quarter on slowing economic growth in the world's second-largest economy and hope that inflation has peaked.

Wen said late on Tuesday that while inflation remains the top priority for Beijing, it will also fine-tune policy if necessary. Market watchers took his comment to mean the government could begin easing its tough monetary policy in the fourth quarter.

RATE CUT COMING?

Analysts at Guotai Junan Securities in Shanghai forecast in a report on Wednesday that Beijing could lower the reserve-requirement ratio for small- and medium-sized banks by the end of 2011 and cut interest rates in the second quarter next year.

Compared to two weeks ago, worries about a China hard landing has eased. The strong interest in resources stocks is down to more macro factors rather than individual company reasons, said Alan Lam, Julius Baer's Greater China equity analyst.

Lam said Wen's comments should spark some buying in better quality Chinese banks, such as Industrial and Commercial Bank of China (ICBC) , by longer-term investors.

ICBC was the top boost for benchmarks in Hong Kong and Shanghai, gaining 1.6 percent and 0.5 percent respectively ahead of its third-quarter earnings announcement on Thursday.

The Shanghai Composite Index closed up 0.7 percent at 2,427.5 points as A-share turnover surged to its highest since Aug 8, while the China Enterprise Index of the top Hong Kong-listed mainland firms closed up 1.9 percent.

Strength in Chinese stocks, particularly in resources-related names, helped lift the broader Hang Seng Index , which was mired in negative territory most of the day, to finish up 0.5 percent at 19,066.5.

But overall turnover on the Hong Kong bourse stayed below average on Wednesday, as it has been all week, suggesting longer term investors were sitting out ahead of the Euro zone meeting and several third-quarter earnings from Chinese companies later in the day.

Weakness in Hong Kong property held back the Hang Seng Index for much of the day. Sun Hung Kai Properties Ltd was the top drag on that benchmark on the day, losing 1.3 percent. It is down more than 20 percent in 2011.

In a report dated Oct. 26, Barclays analysts said office rents in Hong Kong would likely fall by at least 10 to 15 percent in the next two years and could drop by as much as 40 percent in a hard landing scenario.

Gains on Wednesday edged the Hang Seng Index nearer the gap that opened up between 19,247 and 19,454, lows on Sept 18 and highs on Sept 19, seen as offering near-term resistance on the charts.

RESOURCE STRENGTH SUPPORTS GAINS

Much of the strength in Chinese shares on Wednesday was rooted in to resources-related names, extending its outperformance this week that has propelled gains in the broader Hong Kong and Shanghai markets.

Analysts said gains by energy and material stocks were more a reaction to higher global commodity prices more than any company-specific factors. Still several names posted strong gains after reporting better-than-expected third quarter earnings.

Aluminum Corp of China Ltd (Chalco) defied its lukewarm earnings by gaining 3.9 percent in Hong Kong and 2.6 percent in Shanghai in volumes more than twice its respective 30-day averages.

Cement stocks were also strong. Anhui Conch Cement jumped nearly 10 percent in Hong Kong and more than 2 percent in Shanghai after posting third-quarter earnings that were slightly above expectations.

Also boosting the mainland markets on Wednesday that Beijing plans to improve market returns on its 2.4 trillion yuan ($377.3 billion) worth of social security funds, a move that could channel more money into the country's stock market.