Shares in both Hong Kong and Shanghai rose 2 percent on Thursday, lifted by Chinese financials and growth-sensitive sectors after fears of a global economic slowdown eased on U.S. and German manufacturing data that beat expectations.
Chinese banks were bolstered by two developments. First, China's Council late on Wednesday unveiled moves that aim to alleviate funding strains for small- and medium-sized enterprises.
Second, the state parent of the biggest banks appears to have made a concession that would jack up how much they can lend.
Gains in Hong Kong are seen more likely to extend in the short-term after the Hang Seng Index finished at 20,739.5 points, breaking above its 200-day moving average, at about 20,529, which was stiff resistance in the last four sessions.
The Shanghai Composite Index finished at 2,312.6 points, testing the 2,300-2,320 level that has stymied gains for the bulk of January. A break above this could extend gains in the near term.
The China Enterprises Index gained 2.9 percent. The mainland's top lender, Industrial and Commercial Bank of China (ICBC) jumped 3.5 percent in Hong Kong and 2.3 percent in Shanghai.
Thursday's gains on both bourses came in improved trading volumes from Wednesday, with turnover on the Hong Kong main board hitting its highest in seven sessions.
The A-share market is likely to underperform H-shares in the first half because of greater scepticism about policy easing among mainland investors, Alan Lam, Julius Baer's Greater China equity analyst, told Reuters. Mainland Chinese, or A-share, markets are largely closed to foreign investors.
Lam said that in the short-term, a rally could resume in Hong Kong but without much fresh buying by institutional investors, which is likely to cap gains at the next upside target on the Hang Seng Index, seen at 20,975-21,017.
These were the highs reached in September and August, respectively. In addition, 21,017 is the bottom of a gap that opened up between Aug. 4 and 5.
Lam expects the earnings season that starts at the end of February to be a source of downside pressure following profit warnings from several mainland companies this week.
Traders said retail investors were more active buyers of Chinese banking shares in Hong Kong during the afternoon session while institutions were more likely sellers into the rally.
According to Thomson Reuters data, total offers for Hong Kong shares of Agricultural Bank of China (AgBank), which ended up 2.4 percent, outnumbered bids by more than 27 percent.
China's State Council pledged late on Wednesday to lower reserve requirements for small banks that lend to small businesses and will encourage banks to issue special bonds to raise funds for such lending.
Central Huijin Investment Ltd, state parent of the Big Four banks, has agreed in principle to cut the lenders' cash dividend payout ratio this year by 5 percentage points to help ease their capital strains, the 21st Century Business Herald, a mainland newspaper, reported on Thursday.
A Hong Kong-based trader estimated that such a Huijin move would give banks about 400 billion yuan in working capital and probably delay the need for another cut in reserve requirements for commercial bankers until June.
OIL GIANTS STRONG AS GLOOM EBBS
Growth-sensitive sectors were also strong after U.S. factory activity expanded at its strongest pace in seven months in January and Germany's manufacturing sector grew for the first time in four months.
Chinese oil giants tracked higher oil prices with Brent crude rising towards $112 a barrel, extending gains for a third day partly on persistent worries over supply from Iran.
In Hong Kong, CNOOC Ltd jumped 3.9 percent, while PetroChina Co Ltd was up 1.4 percent and China Petroleum & Chemical Corp (Sinopec) gained 1.8 percent.
China National Offshore Oil Corp (CNOOC), parent of CNOOC Ltd, aims to double its oil and gas production by 2020 and triple it by 2030 from the 2010 level, chairman Wang Yilin said at a company event late on Wednesday.
Glencore International L> was up 5.5 percent before trading was suspended about half an hour before markets closed for the day.
The world's largest diversified commodities trader said on Thursday it is nearing an agreement to combine with Xstrata in a deal that may value the combined entity at 52 billion pounds ($82.46 billion).