For the second time this week, Hong Kong mopped up China's losses in Asia trading Thursday as Beijing regulators announced they were considering allowing share swaps between dual-listed Chinese companies. Such swaps would be a positive for Hong Kong "H" shares, but are a negative for the higher-priced Chinese "A" shares.

The news sent the Shanghai Composite diving 175 points below its new 6,000 benchmark, ending the day down 3.5% at 5,825.28. Conversely, after opening above a record 30,000 for the first time, the Hang Seng ended the day up 166 points, or 0.57%, to 29,465.05.

"Market sentiment was obvious today," says Conita Hung, head of equities at Delta Asia Finance Group in Hong Kong. "This type of action will have more impact on Chinese 'A' shares than Hong Kong 'H' shares at the moment."

Currently, companies with listings on both the Hang Seng and the domestic Chinese markets trade at about a 68% premium on the mainland. The disparity in prices is caused by the limited investment options available to Chinese investors and the lack of derivatives products there, making short selling the China shares impossible.

Gainers in Hong Kong included PetroChina ( PTR), up 1.39% to HK$18.92, China Life Insurance ( LFC), which bounced 0.98% to HK$51.30, and China Unicom ( CHU), jumping 1.51% to HK$16.12. All three companies hit record highs in Hong Kong, but in Shanghai, China Life Insurance shares traded down for the second day, falling 1.75% to 67.98 yuan.

Speculation about the possibility of Chinese investors being able to buy Hong Kong-listed shares through the proposed swaps has driven up the Hang Seng by nearly 50% since mid-August.

"It's an amazing gain in such a major index in two months," says Adrian Foster, head of capital markets for Dresdner in Beijing. "When we think about Hong Kong and China getting together, it's going to be China looking more like Hong Kong than Hong Kong looking like China."

Amongst U.S. ETFs, gains may be seen in iShares MSCI Hong Kong ( EWH), though iShares FTSE/Xinhua 25 ( FXI) may fall from its recent highs, Asian commentators say.

In Hong Kong, investors are still skeptical about the noises being made by Chinese regulators. Delta Asia's Hung points out that this is a long-term plan, rather than an immediate one. She recommends buying Chinese rather than Hong Kong insurance and banking companies -- like China Life Insurance -- and holding off on petroleum stocks like PetroChina and China Petroleum & Chemical ( SNP), which she says are overvalued.

Also, Hung says that investors should buy mobile providers China Unicom, China Telecom ( CHA) and China Mobile ( CHL) only for the short term, since it is still uncertain whether Beijing will grant 3G licenses in the country, which are necessary for longer-term revenue streams.

One of the big concerns among China regulators, say Asia money managers, is that by allowing derivative products in the domestic market, they will gradually open it up to foreign capital. That would give Beijing less control over domestic markets, and could in turn lead to scenarios like Wednesday's plunge in Indian markets.

Indian stocks continued to dip after the 9% intraday fall Wednesday. The BSE Sensex closed down 717.43 points, or 3.83%, to 17,998.39.

Infosys Technologies ( INFY) lost mildly, down 0.8%, to 1888 rupees, while Wipro ( WIT) gained 2.2%, to 496.45 rupees on bargain-hunting. Icici Bank ( IBN), which was one of yesterday's biggest losers, plunged 6.99% to 1.038 rupees, while Tata Motors ( TTM) also continued its losing streak, down 3% to 783 rupees.

Still, Hong Kong's gains pulled up the Asian region as a whole. Even as the yen was strengthening to 116.52 vs. dollar, the Nikkei 225 finished up 150 points, or 0.89%, to 17,106, while the Topix also gained, by 17.46, or 1%, to 1617.75.

News that Sony ( SNE) was selling its chip operations to Toshiba ( TOSBF) helped the stock climb 0.55% to 5,430 yen. Toshiba shares lost 0.19% to 1,015 yen.

In Korea, the Kospi jumped 21 points, or 1%, to 2005.09, helped by exporters like Hyundai, which rose 1.6% to 65,300 won.

Daniel M. Harrison is a business journalist specializing 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.

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