After the market closed, the government said retail sales rose 8 per cent by volume in the year to July, slightly below forecasts but still regarded as healthy. Retail spending was expected to receive a further boost during China's week-long National Day holiday at the beginning of next month, which should see a large number of mainlanders visit Hong Kong, analysts said.

New listings, including Hutchison Whampoa's spin off of its second generation mobile businesses, are also likely to keep the market firm.

'The sponsors have to develop a pleasant investment atmosphere by delivering upbeat assessments or by buying into the market,' the sales director said.

Trading volumes eased for the third consecutive day yesterday, to $12.49 billion from a daily average of $14.44 billion in the past three sessions.

After strengthening sharply at the end of last week, the Hong Kong dollar drifted back towards its peg rate, suggesting arbitrage trading to take advantage of higher US dollar interest rates is still outweighing any inflow of funds headed for the stock market.

The Hang Seng Index added 1.21 per cent, or 156.24 points, to 13,104.34. The blue-chip gauge closed above the psychological resistance level of 13,000 on Wednesday last week, but yesterday saw the first decisive break and opened the door for a test of the more important technical barrier near 13,200, analysts said.

The H-share index added 0.95 per cent, or 40.82 points to 4,355.08 led by PetroChina, which rose 1.88 per cent to $4.05, and China Telecom, which was up 1.98 per cent at $2.575. The power, basic material and steel sectors were also firm, while all three insurance companies fell.

Four of the top seven blue-chip performers were property developers and investors, led by a 5.06 per cent gain in Wheelock. The government said a yet-to-be-identified developer had triggered a land auction of the largest site on the reserve list by bidding $5.02 billion, giving the market further evidence that industry players remained optimistic about the outlook for sales and prices.

Hang Lung Properties rose 4.88 per cent to $11.80, Wharf gained 3.74 per cent to $26.35 and Henderson Land was up 2.94 per cent at $38.40. The properties sub-index jumped 2.67 per cent.

Exporters were also in demand following strong United States payroll data for last month on Friday, which included an upward revision of the previous two months. Athletic footwear maker Yue Yuen Industrial rose 2.11 per cent to $19.30, Lenovo Group was up 2.08 per cent at $2.45 and Johnson Electric gained 1.19 per cent to $8.45.

Port operator China Merchants Holdings and carmaker Denway Motors, which were introduced into the Hang Seng Index yesterday, bucked the upward trend by shedding 2.06 per cent and 2.38 per cent respectively.

China Merchants, shrugging off a higher than expected 34 per cent rise in first-half earnings reported in the lunch break, had risen 16.66 per cent in the three weeks after the reshuffle was announced. Denway gained 11 per cent in the period.

'Some investors were taking profits and most funds have already adjusted their portfolios to account for the change by now,' one trader said.

By comparison, Shanghai Industrial and Television Broadcasts, which were removed from the index yesterday, gained 1.44 per cent and 3.78 per cent respectively. This is in line with the historical trend that shows that seven of eight HSI deletions since 2000 outperformed the index in the month following the reshuffle after falling in the weeks beforehand, according to Nomura analyst Sandy Lee.

PCCW dropped 1.94 per cent to $5.05 on a South China Morning Post report saying talks to sell a large stake in its core fixed-line operations to China Netcom had stalled as the two sides were unable to agree on the unit's valuation.

South Sea Petroleum finished 137.83 per cent up at 88 cents as it resumed trading after a 31/2-day suspension preceded by a 95 per cent drop in less than 30 minutes.

The company, which is involved in oil exploration and the manufacturing of electronics components, was the most actively traded stock yesterday but failed to hold on to an early high of $1.43.

'I think most of the buying was speculative. This is not a stock for the faint hearted,' the sales director said.