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Chinese shares close 1.65 percent higher

SHANGHAI - Chinese shares closed 1.65 percent higher Tuesday, extending Monday’s rebound as investor worries over a liquidity crunch linked to an issue of special government bonds eased, dealers said.

They said investors focused on remarks in state media by Xia Bin, researcher with a top think tank, that China’s special treasury bond issue will not ‘severely impact’ the stock market and this provided some relief.

Xia said the issue ‘will only result in a change on the asset side of the central bank’s books -- nothing has changed on the liabilities side -- so it will have no liquidity implications.’

On Friday, Xinhua news agency reported that China’s parliament had approved a draft to authorise the finance ministry to issue 1.55 trillion yuan (204 billion dollars) of special bonds.

Proceeds from the bond sale will be used to purchase 200 billion dollars of foreign exchange, which will then be allocated to a new state forex investment agency to manage.

Investors had been nervous that this plan could sap liquidity as part of overall government efforts to cool the economy and the markets.

At the same time, dealers said a strong yuan also helped the market to continue its rebound as the central bank set the central parity rate Tuesday at a record post-2005 revaluation high of 7.5951 to the dollar.

The yuan has now appreciated a further 6.78 percent since it was revalued by 2.1 percent to 8.11 per dollar in July 2005.

The benchmark Shanghai Composite Index, which covers A and B-shares listed on the Shanghai Stock Exchange, closed up 63.43 points or 1.65 percent at 3,899.72.

Turnover continued to fall, running at 85.51 billion yuan (11.11 billion US dollars) after 89.89 billion yuan in the previous session.

The Shanghai A-share Index was up 66.28 points or 1.65 percent at 4,093.34 on turnover of 84.65 billion yuan and the Shenzhen A-share Index added 22.23 points or 1.97 percent at 1,150.60 on turnover of 43.59 billion yuan.

The yuan ended the day at a record high of 7.5937 against US dollar, up from Monday’s finish of 7.6050.

‘The market extended gains from yesterday’s rebound after the government said repeatedly that the special bond issue will not hurt the stock market. The government is unwilling to see big ups and downs,’ said Wang Sai, an analyst at Wanguo Consulting.

‘Xia’s comments are in line with central bank official Yi Gang’s over the weekend. They provided some relief that the special bonds would not reduce liquidity immediately,’ said Dai Ming, an analyst at Kingsun Investment Management Co.

However, dealers also noted that trade was sluggish, reflecting fragile sentiment and time may be required to restore confidence after heavy losses last week.

Other supply pressures are emerging from upcoming initial public offerings, including those of China Construction Bank, PetroChina, China Mobile, they added.

Heavyweight banks performed well with Industrial and Commercial Bank of China up 0.14 yuan or 2.77 percent at 5.20.

China Merchants Bank rose 0.54 yuan or 2.26 percent to 24.42, while Bank of China advanced 0.09 yuan or 1.80 percent to 5.10.

Property developers were in favor thanks to the appreciation of the Chinese yuan.

COFCO Property (Group) rose 1.35 yuan or 5.87 percent to 24.35, while while China Vanke gained 0.77 yuan or 4.13 percent to 19.41.

The Shanghai B-share Index was up 6.73 points or 2.69 percent at 256.55 on turnover of 853.26 million US dollars and the Shenzhen B-share Index was up 17.53 points or 2.63 percent at 683.04 on turnover of 736.34 million Hong Kong dollars (95.63 million US dollars).