China shares jump most since March, lift HK stocks

* Fund approvals signal regulatory support for China market

* Shanghai index ends just above 5-day moving average

* China Mobile drops after Q2 earnings; weighs on HSI

* Investors seen cautious after recent sharp moves (Updates to close)

By Parvathy Ullatil & Claire Zhang

HONG KONG, Aug 20 (Reuters) - Chinese stocks recouped 4.5 percent on Thursday, posting their second-biggest daily percentage gain of the year, as modest signs of official support for the market helped to trigger technical buying after a 20-percent dive in the two weeks to Wednesday's close.

Hong Kong shares rose 1.9 percent, bouncing off a one-month closing low, but heavyweight China Mobile weighed on the main index after reporting disappointing earnings in the second quarter.

But slow turnover on both bourses signalled investors were less than willing to rush back into the stock market after the recent free fall.

"Today's rally indicates the bulk of the corrective pressure accumulated during the market's bull run earlier this year has now been removed," said analyst Wu Nan at Xiangcai Securities in Shanghai. The index had jumped more than 90 percent since the beginning of the year before its slump of the past two weeks.

"But we cannot say that a day's rally means a decent technical rebound has already been established. It takes time for investor confidence to be restored."

CHINA MOBILE DRAGS

The benchmark Hang Seng Index .HSI finished 374.63 points higher at 20,328.86, bouncing off a one-month closing low on Wednesday. But turnover dropped to HK$57.2 billion from Wednesday's HK$64.4 billion.

"The correction is not yet over. Money has been leaving Hong Kong in recent weeks and some of its has gone back to China. There is concern that Chinese banks will start pushing for loan repayments and force people to pull out their money from the markets," said Patrick Shum, director with BMI Funds Management.

The Hong Kong dollar regained a little ground against the U.S. dollar on Thursday, recovering from a 10-week low in the previous session. [ID:nHKG324556]

The shrinking premium between yuan denominated A shares and their Hong Kong-listed counterparts, which fell to a more than two-month low on Wednesday, could hit the flow of hot money from China as it gave investors less reason to look for bargains in Hong Kong, said analysts.

China Mobile (0941.HK), the world's largest mobile carrier, dropped 0.2 percent to HK$82.85 after announcing a 1.6 percent drop in its April-June quarter earnings amid intensified competition in the Chinese telecom industry.

The China Enterprises Index .HSCE, which represents top locally listed mainland Chinese stocks, was up 2.3 percent at 11,518.84 while the Shanghai Composite Index .SSEC had rebounded 4.5 percent.

Equipment maker Harbin Power (1133.HK) soared after Citigroup raised its rating on the stock to buy from sell, expecting the company to benefit from rising sales volumes and margin expansion in the second half.

The stock was up 7.9 percent at HK$8.24. The brokerage increased its target price on Harbin to HK$10 from HK$7.50.

Chinese telecom equipment maker ZTE Corp (0763.HK) dropped 4.6 percent, even after huge spending by the country's wireless operators on 3G networks lifted its second-quarter earnings by nearly 42 percent, as investors were concerned about weaker-than-expected margins during the period.

CAUTION ADVISED

The Shanghai Composite Index .SSEC closed at 2,911.582 points, after diving 4.3 percent on Wednesday.

Gaining Shanghai A shares outnumbered losers by 884 to 60, while turnover for Shanghai A shares was moderate at 121.7 billion yuan ($17.8 billion) against Wednesday's 121.9 billion yuan.

The rebound nudged the index just above the closely watched five-day moving average, now at 2,905 points. Analysts said a convincing move above that level could indicate the index had stabilised after the recent sell-off.

PetroChina (601857.SS), the most heavily weighted stock in the index, gained 6.85 percent to 13.88 yuan.

Among signs of government support, the China Securities Regulatory Commission granted approval to three exchange traded funds (ETFs) to trade Chinese stock indexes and to two stock-oriented funds over the past several days, state media reports said.

But traders said that investor sentiment remained cautious.

The index's five-day moving average has yet to be overtaken with conviction, and until the next resistance level at the 60-day moving average, now slightly above 3,000, is firmly breached, the market will not have achieved a genuine rebound.

Yangtze Power Co (600900.SS) climbed 5.39 percent to 13.49 yuan following news that its parent company had bought additional shares to support the share price.

During the depths of another market slump in the second half of last year, regulators pushed the parents of major listed firms to buy their listed units' shares to support the market.

"China's economy is still on the right track for recovery and the index's recent fall is just a powerful technical correction," said Zhang Lan, head of research at Changjiang Securities in Shanghai.

Addressing global investor worries over the health of China's economic recovery, Zhang added that corporate earnings in the second quarter improved remarkably from the first quarter.

And in a sign of continued easy money policy, the People's Bank of China auctioned three-month bills in its regular open market operations on Thursday at a yield of 1.3280 percent, unchanged from last week. (Editing by Edmund Klamann and Jacqueline Wong)