Shanghai REUTERS

Hong Kong stocks edged lower on Monday as higher oil prices weighed but a buoyant day in Shanghai shielded the market from bigger declines and underscored the growing optimism for Chinese shares.

A rally in energy counters, in particular coal, lifted the Shanghai Composite .SSEC 1.4 percent by midday to its highest level in nearly four months after helping the benchmark break out above its February peak around 2,940.

Those gains helped markets in Hong Kong outperform the rest of Asia with the Hang Seng index .HSI down 0.2 percent compared with a decline of 0.8 percent for MSCI Asia ex-Japan index .MIAPJ0000PUS.

The main guage of Chinese counters listed in Hong Kong, the China Enterprises index .HSCE, closed the morning flat.

Energy plays were higher with coal counters taking their lead from oil producers.

Coal is a substitute for oil, and as oil prices go up, coal prices follow. Secondly, investment expectations are very strong, said Qian Qimin, analyst at Shenyin and Wanguo Securities in Shanghai.

Everyone wants to participate in this sector.

China Shenhua, China's largest coal producer by market value, rose by the daily maximum of 10 percent in morning trade. Yanzhou Coal, another large coal producer, rose 8 percent in the morning.

Shares of China Shenhua were further boosted after a proposed $8.8 billion project between it and South African petrochemical firm Sasol to turn coal into fuels in northern China received initial environmental approval from authorities.

Shenhua shares in Hong Kong rose 2.9 percent, the top gainers on the benchmark followed by peer China Coal which was up 2.3 percent.

U.S. crude CLc1 surpassed $106 to reach the highest price in 2-½ years as a counter-offensive by Libya's Muammar Gaddafi against rebels deepened concerns that a civil war is brewing in Africa's largest holder of oil reserves.

While higher oil prices helped the energy sector some markets players have raised concerns about the impact of spiralling energy costs on corporate profitability, in particular airlines and the transportation sector.

Shares of Cathay Pacific slumped 3.2 percent and the worst performers on the benchmark. Air China shares slipped 3.8 percent.

China Eastern Air Holding, parent of China Eastern Airlines Corp Ltd, forecast lower profit this year because of high oil prices, said the holding company's Deputy General Manager Li Jun.

China Eastern shares shed 2 percent.

Investors will gain further insight into the possible impact of rising oil prices when Cathay Pacific reports its annual results on March 9.

While the airline is expected to report record profits for 2010 as air travel rebounded sharply, analysts will look for how the company is reacting to a 16 percent rise in crude oil prices so far this year which has pressured its shares and made them the worst performers on the benchmark index.