An interest rate cut on the mainland yesterday lifted H shares and red chips before news of a share placement pared some of the gains. The Hang Seng red-chip index opened sharply higher in reaction to the rate cut, reaching 1,000.95 points before retreating to close at 975.45, up 4.54 per cent from Friday. Capitalising on the morning rally, red chip China Overseas Land & Investment launched a share placement to raise $387.5 million to fund new property projects. The Hang Seng H-share index rose 3.53 per cent to 425.14 points after hitting an intraday high of 433.24. On Sunday, Beijing announced average interest rate cuts of 0.5 percentage point to boost sagging internal demand. Analysts said the move was positive for the bottom lines of mainland stocks and investor sentiment but the effect was limited by the small rate reduction. They said red chips were also attracting speculative buying as they did not benefit from the rate cut as much as the H shares, which had bigger yuan borrowings. BNP Prime Peregrine Securities chief of mainland research Ronald Yung Lynn estimated a 0.9 per cent increase in earnings for the H-share sector next year assuming a one percentage point reduction in lending and deposit rates. The main beneficiaries would be highly leveraged companies such as China Shipping Development, Jilin Chemical Industrial and Tianjin Bohai Chemical Industry (Group). The latest rate cut would provide a 23 per cent earnings boost for Jilin Chemical. However, the news would not bring much comfort to Huaneng Power International, China Southern Airlines and China Eastern Airlines Corp as their debt was mainly denominated in foreign currency. 'The crux of the problems for H shares is that supply [of their products] has outstripped demand while there is overcapacity. The prospects of the sector very much depend on how this issue is addressed,' Mr Yung said. Another analyst said the share prices of quality H shares and red chips would be boosted by mainland investors looking for an alternative investment to yuan. Such investors could be attracted to H-share toll-road stocks and red chips such as China Telecom and Ng Fung Hong.