HK shares snap 2 day slump; China stocks at 10-mnth high

* Turnover improves in both Hong Kong and China

* HKEx shares close at 12-month high of HK$129

* Construction shares jump on hopes for strong economic data

(Updates to close)

By Parvathy Ullatil & Claire Zhang

HONG KONG/SHANGHAI, June 10 (Reuters) - Hong Kong shares rose 4 percent on Wednesday, recouping losses made in the previous two sessions in anticipation of strong China economic data, but Li & Fung (0494.HK) trailed on news of customer Arcandor's (AROG.DE) insolvency.

Chinese stocks rose 1 percent to a 10-month closing high, led by construction-related shares on expectations that economic data for May would show strength in investment and industrial output.

Two Chinese newspapers reported that Beijing was poised to announce the strongest growth in industrial production since last September, well ahead of market forecasts.

Analysts said urban fixed-asset investment in May, due to be announced later this week, was also expected to be upbeat although exports were likely to remain weak.

Meanwhile, price data out earlier on Wednesday was more or less in line with market expectations, with consumer prices easing at a slightly more moderate pace, while producer prices dropped for a sixth month with the rate of decline intensifying. [ID:nBJB000619]

"There were no surprises in the CPI and PPI, as investors expected. Although the economic recovery may not be particularly smooth or rapid, investor sentiment remains positive," said Western Securities analyst Cao Xuefeng.

HKEX SOARS; LI & FUNG SLIDES IN HK

The benchmark Hang Seng Index .HSI closed up 4 percent or 727.17 points at 18,785.66.

Turnover jumped to HK$83.5 billion from Tuesday's HK$71.9 billion.

"Hot money continues to flow into Asian markets but the market is still likely to flounder at the 19,000-point level," said Andrew To, sales director with Taifook Securities.

The main index came within a hair's breadth of 19,000 points last week and has been puching up against the psychologically important level since the beginning of June.

"Investors in Hong Kong, like the tycoons and some big investment banks, are predicting the market will fall 10 to 15 percent from that level, which probably means there are a lot of short positions already built up," he said.

But bourse operator Hong Kong Exchanges & Clearing (0388.HK) jumped 8 percent to HK$129, its best closing level in a year, after JP Morgan raised its rating on the stock to "overweight" from "neutral" on its increasingly stronger ties with mainland Chinese markets and signs of IPO activity picking up.

Other blue chips also raced ahead, with HSBC (0005.HK) advancing 4.3 percent and the world's largest wireless operator China Mobile (0941.HK) jumping 4.5 percent.

Consumer goods exporter Li & Fung (0494.HK) dropped 4.1 percent to HK$22.15 with the insolvency of Germany's biggest retailers, Arcandor (AROG.DE) seen impacting the Hong Kong-based company's plan to boost sales to $20 billion by 2010. [ID:nHKG187021]

Arcandor accounted for 5-6 percent, or around $700 million, of the company's 2008 sales revenue, but its contribution in 2009 had been on the decline, Li & Fung group managing director William Fung told Reuters in a telephone interview.

The China Enterprises Index .HSCE of top mainland companies rose 5 percent to 11,033.55 with bank stocks firmly in charge.

Higher commodity prices supported metal and coal stocks, with the world's No.3 alumina producer Aluminum Corp of China (Chalco) (2600.HK) climbing 8.8 percent, while top coal miner China Shenhua Energy (1088.HK) scaled 6 percent.

CONSTRUCTION COUNTERS

The Shanghai Composite Index .SSEC ended up 28.36 points at 2,816.247 points, climbing 55 percent since the start of the year.

Gaining Shanghai A shares outnumbered losers by 642 to 219, while turnover in Shanghai A shares rose to 143.8 billion yuan ($21.1 billion) from Tuesday's 132.9 billion yuan.

Construction-related shares were strong, with contractors China Railway Erju (600528.SS), Hebei Taihang Cement (600553.SS) and Tengda Construction Group (600512.SS) climbing by their 10 percent daily limit.

"Shares that have lagged in the rally up until now, such as construction-related stocks, are catching up," said Xiangcai Securities analyst Wu Nan. "Money is pouring into sectors with relatively low valuations."

Investor interest was reflected in a rise in the number of newly added trading accounts to 317,509 last week, the highest in the past six weeks, the official China Securities Journal said.

Chinese liquid crystal display maker BOE Technology Group (000725.SZ) soared 28 percent to 6.46 yuan after 5 billion recently-placed shares became tradable. Its recent 12 billion yuan share placement was the biggest fund-raising move in the stock market so far this year.

Shenzhen Neptunus Bioengineering 000078.SZ climbed 4.04 percent to 7.47 yuan after saying one of its subsidiaries had signed a cooperation agreement with GlaxoSmithKline (GSK.L) to develop, research and produce vaccines.

($1 = HK$7.75)

(Reporting by Parvathy Ullatil & Claire Zhang; Editing by Edmund Klamann and Chris Lewis)