Shanghai outperforms Asia on optimism; US data supports

China stocks outperformed Asian equity markets on Monday on economic optimism while sentiment in other Asian shares rose after weak U.S. data soothed fears that the Federal Reserve would reduce its stimulus program anytime soon.

The Shanghai Composite rose to a one-week high, South Korea's Kospi hit a three-day high, Australian equities were steady around 5,137 points but Japan's Nikkei bucked the trend to dip 0.2 percent.

A positive handover from Wall Street late last week underpinned the region's gains. U.S. stocks advanced on Friday with the Dow Jones Industrial Average closing above 15,000 points as a sharp drop in new U.S. home sales calmed speculation that the Federal Reserve will reduce its monthly bond purchases next month. Sales of new single-family homes fell to their lowest level in nine months in July.

ASX 200
CNBC 100

Shanghai rallies 2%

China's benchmark index approached the 2,100 mark to its highest levels since last Tuesday on increased optimism over earnings and the recently-approved free trade zone.

Shanghai International Port Group and Shanghai International Airport, the two firms expected to benefit the most from the free-trade zone, surged 9 percent each.

(Read more: Data could cast bigger shadow on emerging markets)

Sentiment also rose after the nation's statistics bureau said that the economy is showing clear signs of stabilization and is on track to meet the government's 7.5 percent growth target.

Attention was on a raft of corporate earnings. China Construction Bank, the country's number two lender, rose 1 percent after posting a 9.7 percent rise in second-quarter net profit on Sunday, slightly beating expectations. Other lenders rose on the news with ICBC also up 1 percent.

Nikkei down 0.2%

Japanese shares reversed earlier marginal gains as dollar-yen retreated from last week's three-week high of 99.1 yen. Still, some exporters remained resilient in spite of this as the currency pair traded near the 99 handle.

Nintendo and Sony rose 1 percent each but real estate developers led the gains with Tokyu Land higher by 4.3 percent and Sumitomo Realty up 3.5 percent.

Investors can expect an outcome about Japan's sales tax hike before October 7, the nation's economy minister said over the weekend. He said Prime Minister Shinzo Abe will reach a final decision before the start of the Asia-Pacific Economic Cooperation summit meeting that kicks off the first week of October.

Sydney up 0.2%

Australia's benchmark index pared gains after crossing the 5,140 mark to a one-week high but higher metals prices underpinned modest gains for the resource-heavy index.

Gold miners Medusa Mining and Kinsgate Consolidates rose 7 and 6 percent, respectively after gold prices hit an eleven-month high above $1,400 before easing.

(Read more: Gold within striking distance of bull-market territory)

In earnings news, drilling services firm Boart Longyear tumbled 12 percent after swinging to a loss for the first-half and said that it had cut thousands more jobs.

"Comparing the ASX to the S&P over the last four weeks, you can clearly see the out-performance by the local market. The ASX has managed to hold recent gains and punch higher to be up 1.2 percent for the month of August, while the S&P has fallen 2.5 percent from its all-time high on August 1," said Evan Lucas, market strategist at IG.

Kospi up 1%

South Korean equities tracked Asia-wide gains thanks to a rally in blue-chip manufacturers as the yen firmed.

Automaker Hyundai Motor jumped nearly 4 percent and Kia Motors rose 2 percent. Tech exporters benefited as well with LG Display higher by 2 percent.

By's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC