Shanghai Index Roars Ahead

An 8% surge in Chinese mainland equities helped Asian markets have a bullish start to the week Monday, as all the major indices followed the country's largest one-day surge since April 2005.

The Shanghai Composite Index leaped 351 points to 4672, while the Hang Seng jumped 908 points, or 3.8%, to 25,032, making a close above the psychologically crucial 25,000 level for the first time in a week. In Japan, the Nikkei rose 362 points, or 2.7%, to 13,859.

"The market is so sold-off, especially for China, and emerging market volatility is very, very high," says Kit Wong, an analyst for Harris-Fraser in Hong Kong. "The fundamentals are still very good, and this recent technical correction is not a problem for long-term investors. There have been no fundamental changes."

Chinese shares rose after reports that the local securities regulator has approved two new closed-end mutual funds, which are rumored to be raising up to 14 billion yuan ($1.9 billion) for investment in domestic equities.

Leading the charge on the mainland was Aluminum Corp. of China(ACH Quote - Cramer on ACH - Stock Picks), which soared the maximum daily limit allowed of 10%, to 32.34 yuan, after an announcement Friday that the company and Alcoa (AA Quote - Cramer on AA - Stock Picks) paid $14 billion for a 12% stake in miner Rio Tinto(ACH Quote - Cramer on ACH - Stock Picks).China's sovereign wealth fund China Investment Corp. has now agreed to provide up to $120 billion if the company seeks a full acquisition.

China Investment also announced that it may team up with state-owned China Shenhua Energy(CUAEF Quote - Cramer on CUAEF - Stock Picks) to make a bid for around 16% of Australian iron ore giant Fortescue(FSUMF Quote - Cramer on FSUMF - Stock Picks) in a deal worth around $2 billion.

Shares in China Shenhua added 8.6% to 61.62 yuan. Other commodity giants followed in the big gains. PetroChina(PTR Quote - Cramer on PTR - Stock Picks) surged 8.1% to 26.39 yuan, while Sinopec Shanghai Petrochemical(SHI Quote - Cramer on SHI - Stock Picks) gained 5% to 13.02 yuan, after losing as much as 7% of its value last week in snowstorm jitters.

Financials on the mainland also powered ahead. Bank of China(BACHF Quote - Cramer on BACHF - Stock Picks) rose 6.9% to 5.71 yuan, and Industrial & Commercial Bank of China(IDCBF Quote - Cramer on IDCBF - Stock Picks) jumped 7.4% to 7.23 yuan.

In Hong Kong trading, coal producers Yanzhou Coal(YZC Quote - Cramer on YZC - Stock Picks) and China Coal(CCOZF Quote - Cramer on CCOZF - Stock Picks) rose as reports of supply disruptions in China, South Africa and Australia sent prices higher. Yanzhou Coal was 7% higher at HK$14.26, while China Coal rose 6.4%, to HK$19.60.

Mainland insurance stocks got an uplift after reports of damage caused by the snowstorm last week are now said to have been exaggerated. Ping An(PIAIF Quote - Cramer on PIAIF - Stock Picks) climbed 11.7% to HK$62.30, while China Life Insurance(LFC Quote - Cramer on LFC - Stock Picks) advanced 9.3% to HK$32.25. Dealers said that they may become heavy buyers of China Life in the event of a further 5% decline in the price of stock this week.

Telcos also saw gains. China Mobile(CHL Quote - Cramer on CHL - Stock Picks) rose 4.9% to HK$123.40, and China Telecom(CHA Quote - Cramer on CHA - Stock Picks) ended 3.6% higher at HK$6.03.

Alibaba.com(ALBCF Quote - Cramer on ALBCF - Stock Picks) soared 13.6% to HK$20.35, following Microsoft's(MSFT Quote - Cramer on MSFT - Stock Picks) offer for Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) on Friday, since Yahoo! owns a stake in the Chinese company.

Although many dealers are still wary of Chinese tech shares, some anticipate further rises if more positive news in the sector appears in the U.S. On Friday, Baidu.com(BIDU Quote - Cramer on BIDU - Stock Picks) failed to catch the sector's momentum, and rumors circulated that investors may use the 3.7% losses as a buying excuse following China's gains.

Not all market participants are convinced of the bullish longevity of mainland shares, however. Sean Darby, head of strategy for Nomura in Hong Kong, says that the Fed's deep cutting may have negative side effects on mainland Chinese shares, while having the reverse effect on shares in Hong Kong.

"The absence of coordinated easing will hamper Asian equity rallies. Last week's 50 basis point Federal Reserve rate cut to 3% will create substantial policy problems for China as interest rate differentials narrow, adding pressure on the renminbi to appreciate," Darby wrote in a research note.

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