SHANGHAI'S key stock index returned to above 2,000 points yesterday as lenders recovered as a liquidity squeeze eased while the central government's nod for a free trade zone in the city boosted logistics and trade firms.

The Shanghai Composite Index rallied 0.59 percent to 2,006.1 points.

"The cash crunch, the largest negative for the market in June, has been easing, and the liquidity risk has been priced in during previous falls," said Liu Yi, analyst at Huatai Securities.

The Industrial Bank rose 1.2 percent to 9.13 yuan (US$1.49). Shanghai Pudong Development Bank gained 1 percent to 8.12 yuan. The Bank of Communications added 1.8 percent to 4.07 yuan.

Investors were also cheered by the approval from the State Council, China's Cabinet, to establish a free trade zone on a trial basis in Shanghai, according to a statement released on Wednesday after a meeting chaired by Premier Li Keqiang.

Shanghai International Port (Group) Co surged 6.3 percent to 2.72 yuan. Shanghai Material Trading Co surged by the 10 percent limit to 4.69 yuan.