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China stock rally boost volumes, helps Hong Kong-Shanghai equity link

HONG KONG, March 31 (Reuters) - Trading volumes on a landmark share trading link between mainland China and Hong Kong have surged to a record as Beijing takes further steps to boost cross-border trading flows. The benchmark index in Shanghai has gained more than 17 percent so far this year to a seven-year high, far more than any other market in Asia as Chinese authorities steadily ease policy in a bid to prevent a sharp economic slowdown. Hong Kong's stock market has lagged its mainland peers with a smaller 5.7 percent gain in the same period as concerns about slowing retail sales and the local property market weigh on sentiment. But that gap is likely to start narrowing after China said on Friday it will allow its mutual funds to invest in the Hong Kong market to boost the attraction of the Shanghai-Hong Kong stock connect scheme. The link was launched with much fanfare last November, but initial volumes were disappointing. "These steps are significant as they will encourage more onshore mutual funds to step into the Hong Kong markets where better opportunities exist, at least from a valuation perspective in the short term," said a market structure strategist at a European brokerage in Hong Kong. The A-H share premium index which measures price differences for dual-listed companies in both markets, has risen sharply since the stock connect launched in November. A value over 100 indicates that shares in dual-listed companies are cheaper in Hong Kong than in Shanghai. On Tuesday it stood at 135, its deepest discount since October 2011. As a result, trading volumes on the Shanghai-Hong Kong stock connect pipeline has jumped sharply. On Monday, nearly a quarter of the daily quota was taken up on the Hong Kong-bound leg, the highest since the scheme was launched. Cash market turnover reached a record high this year at about 141.7 billion Hong Kong dollars ($18.27 billion) on Monday, the exchange said in a statement. Hong Kong Exchanges and Clearing (HKEx), the stock exchange operator, has upped its reform pace recently by allowing investors to keep their shares in separate accounts rather than transferring them to a broker before selling it, removing a key source of concern for global money managers. "In recent days, regulators have indicated they are moving ahead with their reform agenda and that is boosting investor sentiment towards the Chinese equity markets," said Karine Hirn, a partner at East Capital which manages $3.5 billion in assets. ($1 = 7.7545 Hong Kong dollars) (Reporting by Saikat Chatterjee; Additional reporting by Michelle Price; Editing by Kim Coghill)