SHANGHAI - CHINA'S stock market surged more than 7 per cent to a two-week high and turnover doubled on Monday, led by infrastructure plays, after the government announced a major stimulus package for the economy.

The Shanghai Composite Index, which hovered near 26-month lows last week, ended up 7.27 per cent at 1,874.801 points, just off the day's high of 1,876.162. It was the market's biggest daily rise since late September.

Turnover in Shanghai A shares rose to six-week high of 56.6 billion yuan (S$12.4 billion) from Friday's 28.5 billion. Gaining Shanghai A shares outnumbered losers by 932 to seven, with over 130 Shanghai A shares rising their 10 per cent daily limits.

Analysts said the stimulus package would not quickly end a slowdown in China's economy, given grim global conditions, but it would reduce the risk of the worst-case scenarios that many investors had been fearing.

'The package could boost stocks at least for the short term - it could convince more investors that a floor at 1,500-1,700 points will be firm for a while. More such policies are expected,' said Mr Cao Xuefeng, analyst at Western Securities.

Taihang Cement jumped 10 per cent for a fourth straight day, to 3.47 yuan, though it issued a statement denying speculation that its parent group might plan an asset reshuffle.

However, many analysts said the market would probably not enter a long-term uptrend without clear signs that the economy was recovering, which could take months. Few think the index can rise above 2,000 points any time soon, they said.

'On the one hand, the package is bigger than expected, which could boost stocks in the short term. But on the other hand, it suggests how tough the situation of the Chinese economy is and will remain', said Mr Chen Wei at Minzu Securities, predicting a range of 1,600-2,000 points for the index in coming weeks.

Monetary easing
Clearing the way for a further easing of monetary policy, which investors think is possible as soon as this week, the government said on Monday that producer price inflation fell to 6.6 per cent in October from September's 9.1 per cent. Economists had predicted an October rate of 8.0 per cent.

Financial and property shares were strong, with Industrial & Commercial Bank of China, the biggest bank, rising 5.84 per cent to 3.99 yuan. Vanke, China's biggest listed property developer, gained 7.54 per cent to 6.13 yuan.

In a report, Merrill Lynch predicted multiple Chinese interest rate cuts through next year and said expansionary fiscal policy would prevent next year's gross domestic product growth from sliding below 8 percent, which some analysts consider a key level for business confidence and even social stability.

Morgan Stanley, however, said that while the package would help investor confidence, it was unlikely to cause economic growth to accelerate again, and would not prevent a multi-year slump of China's real estate market.

Goldman Sachs said the package would reduce the risk of major deterioration of banks' assets. It has a buy rating on the A shares and Hong Kong-listed H shares of ICBC, but a neutral rating on other banks such as Merchants Bank and Construction Bank. -- THOMSON REUTERS