China shares soar, boost Hong Kong, as Wen's comments ease policy fears

(Updates to close)

* Premier Wen Jiabao comments on taming inflation boost sentiment

* Hang Seng snaps three-week losing streak, ends up 1.9 pct

* Shanghai up 2.2 pct, its biggest intra-day gain in four months

* Chinese banks see biggest jump on HK and Shanghai bourses

HONG KONG, June 24 (Reuters) - China shares jumped on Friday, posting their biggest two-day gain in six months and boosting the market in Hong Kong, as comments from Chinese Premier Wen Jiabao fueled hopes that Beijing's policy tightening was nearing an end.

Wen wrote in an opinion piece in the Financial Times that he was confident that price rises would be kept firmly under control this year, giving some market players a reason to cover short positions in Hong Kong.

The benchmark Shanghai Composite Index gained 2.2 percent on the day to finish at 2,746.2 points in sharply increased volume, ending the week up 3.9 percent, its biggest weekly rise since early November.

Banks were among the day's strongest performers as buyers piled in, drawn by attractive valuations after heavy selling in recent sessions.

Hong Kong's Hang Seng Index was also boosted by bargain hunting in financial plays, ending up 1.9 percent on the day and 2.2 percent on the week at 22,171.95 points, its first weekly gain in a month. Both Shanghai and the Hang Seng had hit nine-month lows on Monday.

The valuation argument has grown compelling. China Construction Bank Corp , which rose 3.5 percent on Friday, now trades at a 43.3 percent discount to median forward 12-month multiple, according to Thomson Reuters Starmine and at 7.1 times is at the lowest since the depths of the financial crisis in late 2008.

Retail investors plunged back into the Shanghai market, pushing A-share turnover to its highest since mid-April, after a slew of bullish forecasts by local media and brokerages for a market rebound in the second half of this year, traders said.

"Most investors believe the market hit a bottom when it touched 2,610 (on the Shanghai Composite) on Monday," said a trader at a major Chinese brokerage in Shanghai.

"The rally may not be sustainable for now...but with so many people believing it has hit a bottom, its downside is virtually sealed off as well."

The two-day surge in Shanghai has formed a bullish outside weekly reversal on the charts, suggesting the market may have formed a bottom in its slide since April.

The move up on Friday in A-share turnover hitting its highest since mid-April, also suggests that China's avid retail investors are becoming more willing to start shovelling funds back into the market.

Shanghai has been one of the worst performers in Asia this year and last, weighing on sentiment in Hong Kong, as Beijing repeatedly tightened policy to contain inflation.

Wen's comments raised hopes that Chinese policymakers were finished with interest rate hikes and increases in banks' reserve requirements for now, and may even be considering relaxing their policy stance later in the year in the face of a slowing global economy.

But economists said it was too early for China to declare victory against inflation, and warned investors against thinking Wen was signalling an imminent policy change.

"Readers should read the article with some grain of salt," Ting Lu, an economist at Merrill Lynch-Bank of America, he said. "Despite these positive messages from Wen, it could be wrong to expect the Chinese government to change its policy stance soon."

Lu said he still expects China to raise interest rates once more this year. That is roughly in line with market forecasts for a 25-basis-point rise in benchmark lending rates, and a 50-basis-point increase in deposit rates.

CHINESE BANKS LIFTS HANG SENG'S BLUES

The gains in Hong Kong on Friday helped the Hang Seng reclaim the 22,123 level that had been previous support and the previous low of the year, while also filling a gap on the charts.

But unlike in Shanghai, the weaker turnover in the bounce pointed to lower conviction that a rebound would be sustained, and traders said there may be another test of the lows before a bottom is put in place.

The "Big Four" Chinese banks, often seen as a proxy for the mainland economy, jumped on expectations that a peak in inflation would ignite a rally in the sector that has faltered twice this year.

Much of the jump on Friday was supported by banking shares, the biggest weights on the Hong Kong and Shanghai benchmark indexes. They have borne the brunt of the bearishness on Chinese equities over the past two months, pushing their shares to deep discounts versus historical valuations.(Reuters)