SHANGHAI - CHINA'S benchmark stock index rose on Monday to a 5 1/2-month high on investor enthusiasm about added liquidity amid rising bank lending, shrugging off declines in other Asian markets on news of Japan's economic contraction.

The benchmark Shanghai Composite Index climbed 3 per cent, or 68.59 points, to 2,389.59, its highest close since Aug. 29. The Shenzhen Composite Index for China's smaller, second exchange added 1.9 per cent to close at 763.3.

The rise was driven not by economic fundamentals but by a surge in bank lending, which has sent money flowing into the market, analysts said. The government says lending hit a new monthly high in January, driven by a massive stimulus plan.

'The economic fundamentals are not strong enough to support the market's rise,' said Mr Zhang Xiang. 'The market is in an irrational state, which is not going to last long.' The rise came despite a government announcement on Monday that foreign investment in China fell 32.7 per cent in January from a year earlier. That was on top of last week's news that January exports fell 17.5 per cent.

Steelmakers rose after state media said a government stimulus plan for the industry might be issued soon, adding to similar packages for automakers, shipbuilders and others.

Baoshan Iron & Steel Ltd, China's biggest steelmaker, and Liuzhou Iron & Steel Co Ltd both soared by the daily limit of 10 per cent, Baosteel to 6.42 yuan and Liusteel to 4.69 yuan.

Industrial & Commercial Bank of China Ltd, China's biggest commercial lender, rose 3.3 per cent to 4.1 yuan. Bank of China Ltd surged 5.6 per cent to 3.56 yuan, while China Construction Bank Ltd leapt 3.4 per cent to 4.56 yuan.

Beijing Sanyuan Foods Ltd jumped 10 per cent to 6.15 yuan on its first trading day since the stock was suspended in September amid a scandal over tainted milk. Sanyuan said on Saturday it will bid for assets of bankrupt Sanlu Dairy Group, the dairy at the centre of the scandal.

PetroChina Ltd, Asia's biggest oil and gas producer, and China Petroleum & Chemical Corp, also known as Sinopec, both rose 3.6 per cent. PetroChina closed at 12.16 yuan and Sinopec at 9.3 yuan.

In currency markets, China's yuan weakened to 6.8343 to the US dollar, down from Saturday's close of 6.82560. -- AP