Supported by an improved economic climate and consistent inflow of overseas investments, Hong Kong shares surged 0.44 per cent yesterday to a new high since August 2001.

The Hang Seng Index rose 53.91 points to close at 12,440.72, after meeting what analysts described as strong resistance at the 12,500 psychological barrier.

Turnover on the stock exchange amounted to HK$16 billion (US$2.05 billion), down slightly fro m HK$16.4 billion (US$2.1 billion) on Monday.

Analysts said that the strong market performance in recent weeks was fuelled largely by the influx of foreign capital that has been diverted to Asia from the bond market. A sizeable portion of that capital has gravitated to Hong Kong as signs of a turnaround of the local economy are becoming increasingly obvious, the analysts said.

The banking sector is expected to be the first to benefit from the economic upturn which would spur an increase in demand for loans. Since the collapse of the property market in 1997, loan demand in Hong Kong has been on the decline.

A few banks have successfully diversified into fee-based businesses, especially asset management. But the flat loan demand has cut into the profit of many others.

More important, analysts said, was that the pick-up in economic activities leading to a stabilization in unemployment could result in an improvement in the quality of bank loans.

This would, in turn, reduce the need by banks to make large provisions which have been cutting into their profits in recent years.

Unsurprisingly, banks shares did particularly well in yes-terday's trading. Bank of East Asia jumped 4.7 per cent to close at HK$24.50, extending a 44 per cent gain over the past three months.

Hang Seng Bank rose 1.79 per cent to HK$99.25 and Dah Sing Finance, which specializes in consumer lending, surged 9.3 per cent to HK$58.75. Global banking giant HSBC Holdings hit a high of HK$120.50 before slipping back on profit taking. The share closed at HK$119, unchanged from Monday.

Foreign fund managers said that they were bullish about Hong Kong because they believed that the local economy had bottomed out and the stock market rally was based on sound economic fundamentals. Their favourites are banks and the media.

But the property sector did not fare as well yesterday. Analysts said that property companies' share prices have already risen to levels that are showing signs of overheating. Further increases could only be justified if property companies can deliver impressive earnings results, the analysts said.

Cheung Kong (Holdings) eased 0.39 per cent to HK$64.50 in yesterday's trading, while retail and property conglomerate Wheelock & Co fell 0.54 per cent to HK$9.25.

Elsewhere in the market, China's mobile phone and television producer TCL International dropped 1.71 per cent to HK$2.875 after surging to a three-year high of HK$3.20 in early trading. TCL said on Monday that it would team up with French consumer electronics maker Thomson SA to create the world's largest TV manufacturing company.

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