Asian markets leapt Wednesday in a recovery after a two-day selloff, led by 11% gains in Hong Kong, as short sellers got squeezed at the open after a surprise 75 basis point interest rate cut overnight in the U.S. and expectations that the Federal Reserve will cut another 50 basis points also helped lift stocks.

The Hang Seng took back all of Tuesday's losses, leaping 2332 points, to 24,090. China followed, rising 143 points, or 3.2%, to 4703, while in Japan the Nikkei also gained, by 256 points, or 2%, to 12,829.

"Today what you see is Asian markets rebounding sharply, with some stocks gaining phenomenally, but others still going down simply because of liquidity," says Peter Taylor, who helps manage $45 billion for Aberdeen asset Management in Singapore. "Investors will see some funny things going on with liquidity now, one level down from what markets are doing," adds Taylor.

China Watch: How'd Last Week's Stock Picks Fare?

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Markets in Hong Kong were propelled by a 0.75 percentage point cut in local long term interest rates by the Hong Kong Monetary Authority, which usually follows U.S. monetary policy due to the dollar "peg".

An announcement by

Bank of China

(BACHF)

that it will see an increase in net profit for 2007, and speculation that the banks will not have to writedown any of its $8 billion subprime assets also helped lift sentiment in financials. Bank of China shares leapt 8.1%, to HK$3.33 in Hong Kong, but fell 2.9%, to 6.07 yuan in Shanghai as sellers continued to look for liquidity after Tuesday's selloff on the mainland.

Insurance firms fared well after value investors turned their attention to

China Life Insurance

(LFC) - Get Report

, and on rumors that rival

Ping An

(PIAIF)

may make a bid for

HSBC Holdings

(HBC)

. Insurers have been among the most heavily sold in the recent Asian turmoil. China Life Insurance rocketed 15.8%, to HK$31.95, while Ping An soared 9.6%, to HK$65.25. HSBC Holdings rose 11.3%, to HK$116.20.

Other big gainers included

PetroChina

(PTR) - Get Report

, which surged 17.5%, to HK$11.30, as dealers said the stock was oversold at current levels, and

Hong Kong Exchanges

(HKXCF)

, which rose 8.2%, to HK$169.10.

Telecoms also caught the upward momentum of the Hang Seng.

China Unicom

(CHU) - Get Report

climbed the most, by 15.1%, to HK$17.04, and

China Mobile

(CHL) - Get Report

gained 10.5%, to HK$120.30.

The interest rate cuts cheered investors of property stocks, too.

Hang Lung Properties

(HLPPY)

rose 9.9%, to HK$29.50, while

Cheung Kong

(CHEUY)

bounced 10.4%, to HK$130. Conglomerate

Hutchison

(HUWHY)

gained 5.8%, to HK$77.90.

Despite the big gains, a report issued by Citigroup cautioned investors about the economic outlook for China and Hong Kong. The report forecast a slowdown in regional GDP, and a cut in U.S. interest rates to 2.5% by the summer.

"We have probably not seen the full impact of a U.S. recession yet," wrote analyst Yiping Huang in Hong Kong. "It may take a little while before we see a more broad-based slowdown in Asia ... despite the popular decoupling thesis, Asian economic growth rates are likely to shift lower as a result of a U.S. slowdown."

Dealers also expressed confusion over an announcement by the Chinese National Bureau of Statistics that full year economic statistics, including inflation data, will be released Thursday morning, while December's numbers will not be announced until February, since it will be possible to derive last month's results from tomorrow's release. Some said it could mean numbers will be more positive than expected, since Beijing has been trying to cool buying in local markets lately.

In Japan, exporters gained even as the yen rose into 105-territory, a level which is seen as the dividing line for profit and loss-making margins for these companies. The yen was trading at 105.77 vs. 106.44 by the end of the Asian trading session.

Nintendo

(NTDOY)

gained the most, jumping 8.1%, to 54,500 yen, while

Canon

(CAJ) - Get Report

rose 2.8%, to 4340 yen, and

Honda

(HMC) - Get Report

advanced 3.3%, to 3010 yen.

In India, markets followed Hong Kong's big rebound. The Bombay Sensitive Index rose 864 points, or 5.2%, to 17,594, lifted higher by financials.

Icici Bank

(IBN) - Get Report

was up 2.3%, to 1,150 rupees, and

HDFC Bank

( HBD) was 6.6% higher, at 1,534 rupees.

In South Korea, the Kospi rose 19 points, or 1.2%, to 1628, while in Taiwan, the Taiex continued to sell off after recent gains, down 173 points, or 2.3%, at 7408.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

www.theglobalperspective.biz

. He lives in New York.