An investor flashes a sign of victory in this photo taken on July 20, 2007. [newsphoto]

Chinese stocks rose nearly four percent on Monday in spite of an interest rates hike and a reduction on income tax on bank deposits.

The benchmark Shanghai Composite Index opened 0.81 percent higher at 4,091.24 and finished the day at 4,213.36, an increase of 3.81 percent from Friday's close.

Only about ten about of more than 1,300 A-shares posted losses in the Shanghai and Shenzhen stock exchanges.

Steel stocks were especially strong, with about 20 steel shares jumping their daily limit of 10 percent, including Baoshan Iron & Steel and Beijing Shougang.

In the auto sector, FAW Car Co. Ltd., Zhongtong Bus and Tianjin FAW Xiali went up their 10 percent limit.

The financial sector also staged strong performances. CITIC Securities soared 7.04 percent to close at 62.07 yuan per share. The Industrial and Commercial Bank of China rose 2.68 percent to 5.75 yuan, while Bank of China went up 2.27 percent to 5.41 yuan.

That rise came after the central bank raised one-year deposit rate by 0.27 percent to 3.33, and one-year lending rate by the same amount to 6.84 percent to prevent the economy from overheating.

The monetary tightening was a response to a series of economic figures which indicated Chinese economy is heading towards overheating. Gross Domestic Product expanded by 11.9 percent in the second quarter and by 11.5 percent for the first half of the year.

Inflation is also accelerating. Consumer Price Index grew 4.4 percent in June and 3.2 percent for the first half of the year, above the central bank's target of 3.0 percent for the whole year.

Coupled with the interest rates increase, the State Council cut the interest income tax to five percent from 20 percent.

General speaking, interest rates hike have negative effects on the stock market as it increases companies' borrowing cost, thus eroding their profits, and it makes deposits more attractive, drawing some funds away from the equity market.

However, analysts believe the market had been expecting the rates hike and tax cut for some time and had absorbed the negative influences.

Shenyin Wanguo Securities analysts said a great amount of outside capital entered the market as investors foresaw no more negative news in the near future, pushing up the prices.