* Fund approvals signal regulatory support for China market
* Yangtze Power jumps 4 pct on share buyback
* ZTE drops on weak gross margins in 2nd quarter
By Parvathy Ullatil & Claire Zhang
HONG KONG, Aug 20 (Reuters) - China shares bounced off a two-month closing low on Thursday, lifting Hong Kong-listed stocks, amid signs of official support for the sliding markets including the approval of new funds.
A share buyback by the parent company of Yangtze Power Co (600900.SS) and the central bank's stable bill auction yield on Thursday, also helped rein in the 20 percent sell-off over the past two weeks.
"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.
By 0345 GMT, the benchmark Hang Seng Index .HSI was 1.6 percent higher at 20,278.80 with shares worth HK$24.7 billion changing hands.
Analysts read the weak turnover in Wednesday's sell-off as a positive sign for the market, as it suggested there was no panic among investors. Turnover dropped to HK$64.4 billion on Tuesday from an average of HK$80 billion in first two weeks on August.
But 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.
ICBC (1398.HK), the world's largest bank by market value, trailed ahead of its first-half earnings.
The China Enterprises Index .HSCE, which represents top locally listed mainland Chinese stocks, was up 1.6 percent at 11,438.74.
Equipment maker Harbin Power (1133.HK) was the top percentage gainer on the H-share index 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 up 5.5 percent at HK$8.06. The brokerage increased its target price on Harbin to HK$10 from HK$7.50.
Chinese telecom equipment maker ZTE Corp (0763.HK) dropped 3.8 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 concern about weaker-than-expected margins during the period.
Credit Suisse cut its rating on the stock to "neutral" from "outperform", saying it saw limited upside for the stock in the near term after its more than 120 percent surge since the beginning of the year.
The Shanghai Composite Index .SSEC rose 2.1 percent to 2,844.052 by midday.
Turnover for Shanghai A shares was at 60.3 billion yuan ($8.8 billion), while gaining Shanghai A shares outnumbered losers by 713 to 213.
The China Securities Regulatory Commission granted approval to three exchange-traded funds to trade Chinese stock indexes and to two stock-oriented funds over the past several days, official media reports said.
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.
But analysts said economic and market fundamentals might now be less a focus for investors, who have become caught up in the momentum of the market slump.
"After the index breached a series of key technical barriers earlier this week, sentiment will decide the market's near-term trend," said Xu Yinhui, senior stock analyst at Guotai Junan Securities in Shanghai.
"Shorts and longs are expected to fight a fierce battle ahead of the index's half-year moving average," which is now just above 2,700, Xu said, adding that the mutual fund news should give only limited support to the overall market.
Traders said retail investors, who account for about 60 percent of daily turnover on the Shanghai and Shenzhen bourses, had rushed to trim their positions this week amid a panic sparked by the unexpected downward momentum of the market's tumble.
China's young institutional investors, which are dominated by mutual funds and have yet to develop into a true pillar of the market, also took profit on positions built earlier this year at much lower levels.
PetroChina (601857.SS), the most heavily weighted stock in the index, gained 3.8 percent to 13.20 yuan.
Yangtze Power jumped 4 percent to 13.31 yuan after it said its parent company had bought a 1 percent stake in the listed company in a move to support its share price.
During the depths of another market slump in the second half of last year, regulators pushed the parents of major listed companies to buy their listed units' shares to support the market. (Editing by Edmund Klamann and Chris Lewis)