Chinese stocks rose on Thursday, fuelled by a surge in banking shares as investors expect lenders and the economy to benefit from Beijing’s plans to let local governments swap out expensive debt, easing their massive debt burdens.

The market also rose on hopes that China will step up monetary easing to aid the slowing economy.

Both the CSI300 index and the Shanghai Composite Index rose 1.4 per cent at the end of the morning session, with the CSI300 banking index jumping more than 5 per cent to its highest level in six weeks.

Hong Kong’s main stock indices also rose, helped by gains in mainland banks listed in the city.

The Hang Seng index added 0.4 per cent, while the Hong Kong China Enterprises Index gained 1.6 per cent.

China has unveiled plans to exchange local governments’ high-interest maturing debt for low interest municipal or provincial bonds, with speculation swirling that the government would directly purchase bonds from local government financing vehicles (LGFVs), which would constitute a form of quantitative easing.

“Valuation of banking shares have been depressed by concerns of massive bad loans in the worst-case scenario,’’ said Wu Kan, head of equity at Shanghai-based investment firm Shanshan Finance.

“Now with the debt swap, the risks of bad debt have been greatly reduced. Banks need to be revalued.’’

Fresh economic data unveiled this week also fanned hopes that China may soon introduce fresh stimulus measures. Qian Yingyi, a member of the central bank’s monetary policy committee told Reuters on Wednesday that China is likely to cut interest rates or reserve requirements again if consumer inflation drifts below 1 percent.

Lenders controlled by local governments, including Bank of Nanjing and Bank of Ningbo, jumped to their 10 per cent daily limit, while shares of the “Big Four’’ state lenders rose more than 2 per cent.

The liquidity situation is improving as there are signs fresh money is flowing into stocks while the negative impact from the flood of initial public offerings this week is fading.

Last week saw 132.3 billion yuan ($21.1 billion) worth of net money flows into securities deposit accounts, while there was an increase in the number of new accounts opened to trade stocks listed on ChiNext, following a sharp rise in the index that tracks high-growth start-ups, the Shanghai Securities News reported on Thursday.

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