HONG KONG: Hong Kong shares rose 2.28 percent yesterday to close at a seven-month high, gaining ground for a sixth consecutive session, as optimism about US bank stress-test results fueled a sharp rally in shares of heavyweight HSBC Holdings.

Turnover soared to a seven-month high of HK$95.2 billion from HK$80.4 billion the previous day.

"It's not only liquidity that's supporting this rally, the market will be supported by fundamentals," said Alex Tang, research director at Core Pacific-Yamaichi International, adding that a recovery in the US and an 8 percent growth on China's mainland will also lend confidence to investors.

But some analysts expressed wariness over the market's swift rally, as the index has jumped 52 percent from its 2009 low in early March, and questioned its sustainability.

"There are wishful hopes among some investors that the economy may recover soon," said Peter Lai, a director with DBS Vickers. "The stock market has been overbought and all indicators are showing that a correction will happen soon. Investors will take any excuse to take profits."

The benchmark Hang Seng Index finished at 17,217.89, its best closing level since October last year.

In a sign that the stock market may be poised to fall, the relative strength index yesterday reached 80. A level above 70 represents an overbought market, while a reading below 30 signals an oversold market.

"I don't see any fundamentals supporting the Hang Seng Index at this level," said Andrew To, sales director, Tai Fook Securities.

"From the second half of May till late June, I expect some sort of (a) major pullback. It's time to get out of the market now. I'm not advising any of my clients to buy."

HSBC Holdings, which generates a part of its revenue from the United States, rose 5.6 percent to HK$65.05 - its highest level in more than three months.

The US government was due to release stress test results yesterday. Several reports on the capital needs for 10 of the 19 banks under the government's microscope have revealed how well the industry will cope with perhaps the most severe recession since World War Two.

"Most of the US banks have passed the hurdle. This is telling us that for the financial sector, the worst is over," Tang said. "HSBC will not have such huge provisions for its US exposure."

HSBC shares have more than doubled in value since their brutal selloff early in March after the UK's largest lender made a massive cash call to shore up its balance sheet.

The China Enterprises Index of top mainland companies was up 1.5 percent at 9,896.93.

Standard Chartered was up 8.7 percent at a six-month high of HK$153.30, extending gains from Wednesday's session, after the bank reported a record first-quarter profit, reaping the benefits of a focus on Asia and a resilient loan book.

Reuters

(HK Edition 05/08/2009 page16)