SHANGHAI stocks rose to a two-month high yesterday, led by property and financial counters, as investors sold small caps and bought blue chips due to a valuation gap.

The Shanghai Composite Index gained 1.23 percent to 2,321.32 points, the highest close since March 25.

"Blue-chip stocks are getting a boost from funds flowing out from small-cap stocks that have been overvalued after gains last week," Xiangcai Securities said in a report.

The price-to-earnings ratio of the CSI 300 Index, a gauge of the performance of blue chips traded on the two domestic bourses, was about 10 times while the PE ratio of small- and mid-cap stocks was 25 times, Dongxing Securities said.

Property developers led the gainers, with Poly Real Estate, China's second-largest listed developer, up 3.3 percent to 12.64 yuan (US$2.06). Gemdale Corp gained 4.4 percent to 8.06 yuan.

"The government's intention to expand the property tax trial hinted that China is planning to regulate the housing sector through a market mechanism instead of simply curbing housing prices. This will help boost the valuation of property stocks," CITIC Securities said in a report.

The National Development and Reform Commission said last week that China is eying an expansion of a property tax trial to more cities at the right time with "concrete measures" being taken this year.

Haitong Securities rose 4.8 percent to 12.02 yuan after its executives pledged to transform the business to boost its profitability. Founder Securities surged 7.1 percent to close at 7.87 yuan.