RPT-UPDATE 1-China shares rebound from plunge on policy hopes

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By Andrew Torchia

SHANGHAI, June 5 (Reuters) - China's main stock index plunged more than 7 percent on Tuesday before rebounding to close 2.6 percent higher, boosted by rumours that the government would soon issue a policy statement designed to restore investor confidence.

As prices swung wildly and rumours swept the market, some fund managers said stocks might be ending a five-day slide that pushed the index down as much as 21 percent and erased $490 billion of value at one stage.

Many local and foreign mutual funds, some of which were more than 90 percent invested in Chinese stocks early this year, are believed to be only around 50 percent invested now. Stocks could rise further if those funds decide the market has bottomed.

"A lot of our fund managers are expecting it to hit the bottom today, probably, or maybe later this week," said Gabriel Gondard, deputy chief investment officer of Fortune SGAM Fund Management, which manages about 27 billion yuan ($3.5 billion).

But others fear panic selling by millions of Chinese individual investors, who have poured into small-cap, speculative stocks over the past few months and now face losses of 30 percent or more, could still push the market much lower.

"I have no words for this market -- it's out of its mind," said Wu Nan, an analyst at Xiangcai Securities.