China shares rose on Friday, supported by banks, while a bout of short-covering in Hong Kong after Wall Street's overnight rally helped cement the advance for the Hang Seng. The Hang Seng Index rose 1.2 percent closing above a near-term chart resistance that had capped its advance over the past two months.
Shanghai's key stock index ended up 1.4 percent at its highest close in 3-1/2 months sustaining a rally in shares of Chinese firms listed in Hong Kong. Mainland banking shares, seen as undervalued, continued to rise with the sector sub-index in Shanghai rising 1.6 percent, poised to end the week with a 5 percent increase.
"Chinese banks on average are trading at a discount to their BRIC peers," said Stanley Li, China banks analyst at Mirae Asset Management, referring to the banking sector in other emerging markets Brazil, Russia and India. "Earnings are expected to be solid and with inflation fears subsiding I think investors are finding value," said Li.
Property firms also outperformed in anticipation of more policies to support affordable housing. The property sub-index gained 2.8 percent. China Vanke, the country's biggest developer by sales and due to release annual results on Monday rose 1.8 percent. The National People's Congress, a 10-day meeting when the government outlines the policy agenda for the year, will begin on Saturday.
Inflation control is expected to be top priority and rebalancing the economy to give consumption a larger role in China's economy will be a key theme at the meetings, HSBC said in a report on Friday. Short-covering added to gains in Hong Kong after bearish bets as a percentage of total turnover in the market hit their highest level earlier this week.
The biggest single-day gain for stocks in the US and Hong Kong's benchmark holding above a stubborn chart resistance prompted some investors to cut back on short positions. Shares of Tencent Holdings, which dominates China's online gaming industry, rose 4.4 percent to a record high and were the biggest boost to the broader market.
"Over the past 2 weeks, 9.5 million shares have been shorted including 2.8 million this week, so that's helping to provide some juice," said a Hong Kong-based trader. Tencent shares have jumped 30 percent this year, far outpacing the benchmark's 1.6 percent advance and bringing the company's market value to a shade below $50 billion. Bucking the upward trend, Chinese car maker BYD Co Ltd shares fell 2 percent after it reported that its February sales had fallen by about half compared with January.
Investors locked in some quick gains in BYD after the shares rallied nearly 15 percent over the past two sessions. Shares of BYD, down 16.3 percent this year, are still overvalued by some measures with most analysts wary of the company's abilities to gain market share and meet targets. According to Thomson Reuters Starmine, the company's shares still trade at a 31 percent premium to their historical forward 12-month earnings multiples, suggesting that investors looking for value are likely to stay away for now.