Asian markets surged on Wednesday, as Wall Street's rally gave investors the impetus they needed to resume yen carry trade positions and buy heavily into the last week's declines.

Hong Kong and China led the giant rally, with the key indices soaring 4.9% each. The Hang Seng rose 1362 points, to 29,166, while the Shanghai Composite Index jumped 254 points, to 5412.

"There are quite a lot of discounts now in Hong Kong after the last few days," says Conita Hung, head of equities at Delta Asia Finance in Hong Kong. "Liquidity is still plentiful on the mainland and interest rates are still on a downtrend in the U.S. and Hong Kong. China is increasing interest rates but the increases are still quite low."

Hung has a year-end target of 33,000 for the Hang Seng, and says that property stocks in Hong Kong will be the major beneficiaries, while financials on the mainland are attractive buying opportunities as they are shielded from sub prime exposure.

"I expect the Hang Seng to reach a new record by the end of this year, but the market will still fluctuate quite a lot over the next one and a half months," adds Hung.

Chinese telecoms were the big gainers of the day in Hong Kong, as China Mobile ( CHL) leapt 9.23%, to HK$140.80, China Unicom ( CHU) gained 6.16%, to HK$15.44, and China Netcom ( CN) rose 5.21%, to HK$21, while China Telecom ( CHA) surged 8%, to HK$5.75.

Property stocks, which have been the most resilient to the recent sell-off, rose in tandem in today's trading in Hong Kong. Sun Hung Kai Properties ( SUHJY) gained 2.3%, to HK$11.78, Cheung Kong Holdings ( CHEUY) bounced 3.52%, to HK$149.80, while Hutchison Whampoa ( HUWHY) and Henderson Land jumped 3.8% each, to HK$93.40, and HK$71.80, respectively.

Financials also fared well, with China Life Insurance ( LFC) ending the day up 6.64%, to HK$45.75, while Ping An gaining similarly, by 6.51%, to HK$95.70. UBS upgraded its rating for China Life, to "buy" from "neutral", citing an expected growth in income from premiums of 20% in the fourth quarter vs. 6.7% so far this year. UBS also said China's largest insurer was making unrealized profits of 18 billion yuan

HSBC Holdings ( HBC) rose 1.24%, to HK$139. In after hours trading, HSBC announced in London that the bank will have to write-down $1.4 billion more than was expected in the first two quarters of the year, due to losses incurred on sub prime mortgage loans. That's a total write-down of $3.4 billion for the third quarter vs. an expected $1 billion. Many say the extent of the loss may give an indication of sub prime weakness to come.

In commodity stocks, despite a weakening price for crude, PetroChina ( PTR) surged by 7%, to HK$15.74, on momentum buying, while Sinopec Shanghai Petrochemical ( SHL) rose 4.53%, to 15.68 yuan, and Aluminum Corp of China ( ACH) surged 10%, to 38.29 yuan.

The Nikkei, which fell on Monday to give away all of this year's gains, rose 347 points, or 2.47%, to 15,499, led by financial stocks and exporters, which benefited from the weakening yen.

Mitsubishi UFJ ( MTU) rose 6.26%, to 967 yen, Mizuho Financial ( MFG) gained 6.4%, to 550,000 yen, while Sony ( SNE), Canon ( CAJ), and Toyota ( TM) all jumped between 2.3% and 4.5%.

In currency trading, the dollar was buying 111.48 yen vs. 110.90 yesterday, according to Bloomberg.

In Korea, the Kospi finished up 40 points, or 2%, at 1972.

Beijing announced that retail sales in October rose 18.1% on the year. That's a record growth rate for retail sales, prompted in part by investors' stock market gains this year, said the announcement.

With recent falls in the major indices, strategists in Asia have been speculating when Hong Kong hedge funds would resume the practice of borrowing in Tokyo at 0.5% interest rates, and investing on the island, known as the yen carry trade.

Now, some say this may resume, and most agree with a bullish, if volatile, end to the year for Chinese equities, especially if the Federal Reserve cuts rates one more time in December.

"There's room for a U.S. interest rate cut -- that would spill down and create liquidity in Hong Kong and China markets. Secondly, we expect strong earnings at the end of 2007 and probably in 2008, too," says Peter So, head of Hong Kong and China strategy for DBS Vickers in Hong Kong. "That's a good reason for investors to allocate more funds to assets in Hong Kong and China."

So also expects Beijing to begin allowing more Chinese institutions to buy Hong Kong side shares, which would be a plus for most U.S. ADRs. He adds that most of the buying action will be seen in properties, financials and consumer stocks.

"Consumer stocks will benefit from high consumption in China and at the end of the year, when many workers get their bonus payments," says So. "I'm still working on a target but in 2008 the Hang Seng index will reach around 37,000 points. I think this is achievable."

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.

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