The stock market surged yesterday, with shares in the financial sector leading the way. Jin Siliu

SHANGHAI: China's major stock index surged 3.81 percent yesterday as investors began to move back into shares, believing the latest government monetary measures have cleared uncertainties overhanging the investment environment for the past several weeks.

People's Bank of China announced a 27 basis point hike last Friday in both the benchmark one-year lending and deposit rates, starting from last Saturday.

The State Council also announced a tax cut on interest income, down to 5 percent from the current 20 percent, effective from August 15.

Analysts said that the moves were mild, indicating the central bank is not prepared to take any significant further measures to tighten liquidity in the foreseeable future.

The Shanghai Composite Index rose 154.51 points to close at 4,213.36, with 867 out of 902 stocks closing higher. Turnover on the Shanghai bourse was 154.3 billion yuan, up 47 percent from 104.7 billion last Friday.

Analysts said the fundamentals of profit growth for listed companies and plentiful market liquidity have not changed after the latest tightening moves.

"Investors regained their confidence quickly after the anticipated government measures became clear and on the wide expectation of good performance for listed companies in the first half of this year," said Li Huiyong, an analyst at Shenyin Wanguo Securities.

"Many institutional investors began to enter the market, indicated by the good performance of big-cap stocks in the financial and real estate sectors, which were largely held by mutual funds," said Li Maoyu, an analyst at Changjiang Securities.

"There is no official talk of a wide-ranging set of macro-adjustment measures being formulated, and indeed the domestic stock market has had a couple of good days, which suggests that it is also relaxed about imminent policy measures," said Stephen Green, an economist at Standard Chartered, in a recent report.

Cheng Zhou, a senior analyst from Guotai Asset Management Co Ltd, said: "The intensive announcement of half-year reports for listed companies will begin from this week, which is expected to propel the stock market upward."

Though no imminent monetary tightening measures are expected, analysts said the government may impose administrative measures to curb investment demand.

"The authorities are likely to resort to continuing administrative controls on credit and land supply to contain the risk of overheating," said Frank Gong, chief economist at JPMorgan Securities. "For example, we expect more guidance on commercial banks to moderate overall loan growth during the second half of this year."

Liang Hong, an economist at the Goldman Sachs, said the government may increase persuasive measures on commercial banks to curb lending, along with other administrative moves to dampen investment demand.

Stocks in the financial sector led the increase in yesterday's trading. CITIC Securities jumped 7.04 percent to close at 62.07 yuan, while Shenzhen Development Bank surged 8.1 percent to close at 32.95 yuan.

"The gap between the lending and deposits rates was not narrowed, thus the measures will not squeeze bank profit margins," said Li.

Stocks in furniture and real estate sectors also performed well.