HK shares seen rallying on China oil price surprise

HONG KONG, June 20 (Reuters) - Hong Kong shares are expected to open sharply higher on Friday after Beijing announced a bigger-than-expected fuel price hike much sooner than forecast.

In a bid to control demand, ease supply constraints and mollify its troubled refiners, China unexpectedly raised fuel prices by up to 18 percent overnight, taking the global market by surprise and sending U.S crude oil prices tumbling.

Most market watchers did not expect the energy price revision to be announced before the Beijing Olympics.

In addition to increasing gasoline and diesel prices, China also hiked jet fuel costs by 25.2 percent, increased retail electricity prices by an average of 4.7 percent and imposed a price ceiling on coal.

It was China's first fuel price hike since November last year and first power price revision since June 2006.

"We will see a sharp rebound in the market today, led by H-shares, as the sectors that stand to gain are heavyweights. But with yesterday's announcements, inflation has become a bigger concern than ever and the worst is definitely not over for investors," said Alex Tang, research director with Core-Pacific Yamaichi International.

The energy price hikes are expected to shore up the bottom lines of Chinese refiners Sinopec Corp (0386.HK), Sinopec Shanghai Petrochemical (0338.HK) and Petrochina (0857.HK), as well as power producers.

But shares in coal companies, airlines, car makers and non-ferrous metal producers are seen taking a hit from the latest round of government intervention.

The fuel and power price hikes will also put the spotlight on inflation, which eased to 7.7 percent in May from a 12-year high of 8.5 percent in February.

"If China has to tighten as a result of heightened inflation pressure, the property, bank, cement, steel and construction sectors may get hurt," said analysts with Merrill Lynch in a note to investors on Friday.

The Hang Seng Index .HSI closed down 2.3 percent on Thursday as investors were disappointed by the lack of market-boosting measures from the mainland government.

STOCKS TO WATCH

* Sinopec and Petrochina will add to their recent rally as the fuel price increase is seen partially bridging the gap between international crude oil prices and China's state-controlled prices of refined products. But some investors may exit their holdings in the refiners, booking profits on recent advances.

Sinopec's ADRs (SNP.N) surged 7.7 percent in New York overnight, while PetroChina (PTR.N) jumped 4.4 percent.

Golman Sachs upgraded its rating on Sinopec, Shanghai Petrochemical and Petrochina. It also increased its target price on the stocks and revised upward their earnings estimates.

* Power producers Huaneng Power (0902.HK), Datang Power 0991.HK and Huadian Power <1071.HK will be watched for gains on the retail electricity price hikes.