But as traders and investors tallied up their portfolio gains, a senior banker and analysts warned of the downside of short-term volatility.

The Hang Seng Index raced past its previous historical high, gaining 655.84 points or 2.86 percent to close at 23,577.73, while mainboard turnover peaked at a record HK$126.34 billion. Trading was heavy.

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Expectations of more than HK$300 billion flowing into Hong Kong under the Tianjin pilot scheme are helping to fire the rally, particularly China plays.

Credit Suisse said yesterday it recommends going "overweight" on Hong Kong stocks, from "market weight."

"With gross domestic product on the rise, inflation accelerating, and China opening up the flood gates, there is no reason why one should not be more positive on Hong Kong," said analysts at Credit Suisse. "However, our bottom-up HSI index target is just 24,500, only 7 percent from here. Stock picking seems to be a lot more important than index calls."

The China Enterprises index of H shares rallied to a record 13,989.87, rising 811.78 points or 6.16 percent.

Bulls were led by market heavyweight China Mobile (0941), the world's biggest wireless-phone operator by users, which broke its own previous high, jumping 4 percent to HK$100.60. Aluminium Corp of China or Chalco (2600), the mainland's leading aluminum refiner, rocketed 31.94 percent to HK$21.40.

"Expectations of the commencement of the pilot scheme this week fueled optimism, which took the Hang Seng Index and H-share index to new highs, " said Phillip Securities director Louis Wong Wai-kit. He said the bourse had made a U-turn since the subprime turmoil rattled the HSI more than a week ago. "The market has turned from overly pessimistic to very optimistic. With an oversold market, we have seen a strong rebound."

Shares could rally further on expectations the Federal Open Market Committee will trim the benchmark interest rate from 5.25 percent, and the market may find more support from good earnings growth. But a pullback is also possible, analysts say.

Hang Seng Bank (0011) chief executive Raymond Or Ching-fai said the market had become volatile and urged caution. "The market can be oversold and overbought easily," he said.

Or expects the Federal Reserve to cut the benchmark interest rate by 25 basis points at its September 18 meeting.

He believes that while H shares, which are trading at a relatively large discount to their A-share counterparts, will attract mainland investors, they will be less enthusiastic about investing in Hong Kong as the yuan continues to appreciate against the Hong Kong dollar.

Echoing his caution, chief operating officer at KGI Asia, Ben Kwong Man- bun, believes the market has overreacted. "The market is now going up at a very quick pace. This means, once the target is reached, we will see a very sharp retreat, but I cannot tell when."

The HSI jumped 12 percent last week - the biggest weekly gain since October 1998 - after the launch of the Tianjin pilot program.