(Reuters)
Updated: 2007-06-08 15:15

China's main stock index rose 0.57 percent on Friday, adding to Thursday's 3.03 percent gain, but the banking sector was soft on worries about a possible hike in interest rates.

"Yesterday's rebound of the market was both technical and psychological, but it was temporary," said Tang Zhenbing, analyst at Hongyuan Securities, who predicted the rally would soon run out of steam.

"Investors learned a lesson in this week's plunge, so they will be more cautious. And the possible interest rate hike increases their uncertainty."

The Shanghai Composite Index ended up 0.57 percent at 3,913.14 points. Turnover in Shanghai A shares increased to 179.39 billion yuan from Thursday's 177.77 billion, suggesting some buyers were continuing to return after they withdrew in the wake of last week's hike in the stock trading tax.

The number of new A-share investment accounts opened on Wednesday was 206,000, up 40,000 from the previous day, another sign that investor confidence was recovering.

But traders said many retail investors and funds were cautious about pushing the index above 4,000 points, which they thought might prompt more government action to cool the market.

In addition, many analysts expect an interest rate hike in coming days or weeks since May inflation, to be announced next Tuesday, is projected to be the highest this year. The market ignored previous rate hikes, but is more fragile now.

Some analysts believe the central bank may again raise benchmark deposit rates more than lending rates, which would hurt banks' margins.

This concern helped push down the heavily weighted banking sector, with Pudong Development Bank down 3.45 percent to 31.6 yuan and Merchants Bank down 2.03 percent to 21.24 yuan.