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

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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.

“Any rebound will just bring another sell-off, as confidence has gone.”

The Shanghai Composite Index .SSEC dropped as much as 7.25 percent on Tuesday morning before jumping in the afternoon to close 2.63 percent higher at 3,767.101 points, less than two points off its intra-day high.

A total of 486 shares rose while 374 fell. Turnover in Shanghai A shares was an active 175.1 billion yuan ($22.9 billion), rising from Monday’s 143.0 billion yuan as some buyers returned to the market.

The market’s slide was triggered by the government’s announcement last Wednesday that it was raising the stock trading tax to cool a bull run that had nearly quadrupled the index over the past 18 months.

Much will therefore depend on the government’s actions in coming days. A strong stock market is key to Beijing’s economic reforms, so authorities are expected to intervene if necessary to prevent a collapse of stocks that could damage the economy.

Rumours spread on Tuesday afternoon that officials from the securities regulator, the finance ministry and other agencies planned a meeting to discuss how to stabilise stocks.

The government may issue a statement saying it will not introduce a capital gains tax for three years, and promising other market-friendly policies such as more injections of assets by state companies into their listed units, the rumours said.

“The index will rebound to 3,800 or maybe 3,900 points this week,” said Wu Feng, analyst at Tianxiang Investment Consulting, noting that it had managed on Tuesday to close above 3,500, which is seen by many in the market as technical support.

Other analysts, however, noted attempts by authorities to revive confidence at the start of the week -- positive editorials in state-run newspapers about the market’s trend, and regulators’ approval of four new equity investment funds -- had failed.

That suggests to some that individual investors will continue to sell into any rally, weighing on the stock market for months and conceivably pushing the index down as far as 3,000 points in coming weeks.

A drop to 3,000 would represent a 30 percent pull-back from the market’s high, which according to technical analysis is a common retracement in the context of a long-term uptrend.

Such a drop would still leave the index up 10 percent from the start of this year, and many institutional investors would still be sitting on sizeable profits. But many small investors would be wiped out.

Blue chips favoured by institutions led Tuesday's rebound, with oil refiner Sinopec 600028.SS0386.HKSNP.N jumping 6.15 percent to 14.49 yuan.

CITIC Securities Co. 600030.SS, China's biggest listed brokerage and thus a barometer of the market's health for some investors, soared 8.16 percent to 58.48 yuan after announcing an offer of up to 350 million new shares which could raise around 19 billion yuan.

But many small-cap shares favoured by individual investors remained weak. Hangxiao Steel 600477.SS, a small steel structure maker which has risen nearly tenfold this year, slipped 6.11 percent to 19.82 yuan, bringing its losses from last month's intra-day peak to 34 percent. ($1 = 7.64 yuan) (With additional reporting by Charlie Zhu)