Hong Kong shares edged up to a three-week high on Thursday as a rally in China Life and other insurers on the back of low valuations and speculation over an expansion of investment rules, helped the benchmark stock index outperform Asian peers.

But gains were limited in thin trading volume as market participants cautiously eyed further developments in Europe, with a key Spanish bond auction later in the day set to test investor confidence in that country's debt-laden economy.

Yesterday's 1 percent rally in the Hang Seng looked to be short-lived considering the negative spillover from global markets, said a trader at an Asian brokerage in Hong Kong, adding that it was largely insurers holding the benchmarks up.

The Hang Seng index rose 1 percent, its highest since March 27. The China Enterprises index was up 1.4 percent, with the 3.9 percent bounce in shares of China Life providing the biggest boost to the benchmark.

On the mainland, the Shanghai Composite fell 0.1 percent a day after posting its biggest one-day percentage rise in more than two months.

Insurers have been drawing healthy investor interest after sharply underperforming the market last month.

On Thursday, the sector's gains came on healthy volumes in an otherwise lacklustre day in Hong Kong as well as Shanghai on speculation that China's industry regulator would expand investment options for the sector.

Shares of China Life and smaller rival Ping An fell more than 16 percent and 13 percent, respectively, in March, compared with a 5.2 percent drop in the Hang Seng index. This month China Life is up 4.5 percent and Ping An is up 8.4 percent, outpacing the benchmark's 1.5 percent rise.

Deutsche Bank analysts said in a research note that while new business growth is likely to remain challenging for Chinese insurers, these concerns are already factored into their share prices.

First-quarter life insurance premiums ranged from a drop of 7.5 percent to an increase of 16 percent year-on-year for companies it tracks, according to Deutsche Bank, which has China Life and China Pacific Insurance Corp as its top picks.

China Life shares currently trade at a 32 percent discount to their median forward 12-month price-to-earnings multiples, according to Thomson Reuters Starmine.

New China Life Insurance Co Ltd, which went public last December, rose 8.4 percent in more than three times its 30-day average volume in Shanghai to a record high. Its Hong Kong-listed shares gained 5.6 percent.

Elsewhere, shares of Chinese Internet firm Tencent Holdings finished flat on the day but hit a fresh record high intra-day as retail investors continued to buy the stock.

Overall trading activity remained sluggish in Hong Kong with turnover hitting its lowest since January 13.

At HK$43.9 billion ($5.7 billion), turnover was 22 percent below its average over the past month despite a late-day bout of short-covering as stop losses on index futures were triggered just below the Hang Seng's 50-day moving average, currently at 20,996.

Doubts over Europe's ability to stick to harsh measures to slash high public debt began to grow when Spain abruptly relaxed its deficit targets earlier this month, and Italy said on Wednesday its priority was now reviving economic growth, delaying by a year its budget balancing goal.