* Chinese shares rise 0.7 percent in morning trade
* Financials strong; commodity companies firm
* Yuan rises slightly; could be used in inflation fight
* NDFs imply slightly faster appreciation in next year
* Bond yields basically flat as tightening was expected
By Jason Subler and Lu Jianxin
SHANGHAI, Dec 27 (Reuters) - Chinese investors took the central bank's surprise interest rate rise in stride on Monday, relieved the long-awaited move was finally out of the way and buying financial shares on the potential for higher earnings.
The 25-basis-point increase in benchmark lending and deposit rates by the People's Bank of China (PBOC) on Christmas Day came somewhat earlier than many investors had expected, suggesting the authorities may be front-loading its tightening measures.
The benchmark Shanghai Composite Index rose 0.7 percent by mid-day to 2,855 points, with banking and insurance shares rising on expectations that higher benchmark rates would improve their returns from loans and bond investments.
"It is a typical case of selling the rumour but buying the fact. People think the shoe has dropped -- all short-term negative news is out of the way, so it is time for some bargain hunting," said Zheng Weigang, senior stock trader at Shanghai Securities.
"But the rally won't go far, as China is now in a monetary tightening cycle, with inflation so high. We retain our forecast that the index will move narrowly in coming weeks."
Bond yields rose only slightly, reflecting that tightening steps to control inflation had already been priced into the markets for weeks, and the yuan -- largely guided by the central bank via its daily mid-point -- was basically flat.
RELIEF IN METALS
Still, stock investors bought shares of companies either seen as benefiting from higher rates or for whom the impact was seen as being not as serious as previously anticipated.
The top three insurance companies all gained: China Life Insurance rose 1.1 percent, while China Ping An Insurance Co rose 1.7 percent.
Investors were also relieved that the prices of base metals from copper to zinc did not take a serious hit from the rate hike, as has had happened following the PBOC's last rate rise, in October. [ID:nL3E6NR02I]
Jiangxi Copper , the second biggest Chinese commodities-related firm in terms of market capitalisation, rose 3.2 percent.
Many economists viewed the latest rate rise -- the second in just over two months and following a number of increases in banks' required reserves -- as a positive for the economy and corporate results in the long term as it could help keep inflation from getting out of hand.
Still, analysts said that the jury was still out on whether the market would take a hit in the medium term, as tighter monetary policy could bite into companies' margins.
"Some believe that inflation will now be under control, leading to a soft landing of the economy. That, combined with confidence in the global economic recovery, pushed up commodity stocks today," said Huang Yan, a fund manager at Guotai Asset Management Co in Shanghai.
"But the market still expects several rate hikes next year, so it's premature to judge that now is the beginning of an upward trend."
SIGNAL ON YUAN?
Investors will also be watching closely for signs of whether the PBOC appears set to let the yuan strengthen more quickly in the coming months as another weapon in the fight against inflation, which hit a 28-month high of 5.1 percent in November.
The yuan rose slightly against the dollar by mid-day on Monday, after the central bank set its daily mid-point at 6.6305 -- stronger than the mid-point last Friday.
The yuan was trading at 6.6264 per dollar, compared with Friday's close of 6.6270.
Some traders took that rise, even though slight, as a sign that the central bank could be ready to tolerate further appreciation for the yuan, after letting it strengthen by 0.9 percent against the dollar over the past week.
"Letting the yuan rise right after a monetary tightening step is a rare phenomenon, as the government typically hopes to curb speculation of yuan appreciation right after such a step," said a senior trader at a major Asian bank in Shanghai.
"The government appears thus to be giving a signal that it will use both interest rates and the exchange rate to fight against inflation, including imported inflation."
Offshore, one-year dollar-yuan non-deliverable forwards (NDFs) fell slightly to 6.4760 bid from Friday's close of 6.500, with implied yuan appreciation in a year's time rising to 2.39 percent from 2.01 percent shown on Friday.
The domestic bond market was little moved, given it had already priced in a number of interest rate rises over the coming year in the wake of the first rate rise in October.
The benchmark five-year government bond yield inched up just 1 basis point to 3.56 percent at midday from 3.55 percent at the close on Friday. ($1 = 6.63 yuan) (Additional reporting by Chen Yixin and Samuel Shen; Editing by Tomasz Janowski)