China stocks recover for third day, regulator curbs margin lending

SHANGHAI (Reuters) - China stocks, led by small caps, extended their recovery for a third day on Monday, raising hopes that measures taken by Beijing to prevent a full-blown market crash have worked.

Regulators have launched a fresh crackdown on margin lending as signs have re-emerged that speculators - who only a few days ago scrambled to unwind their leveraged positions - are again borrowing money to bet on the rebound.

The Shanghai Composite Index closed 2.4 percent up at 3,970.39. It has gained 13.2 percent during the past three sessions.

Having briefed rallied above the a key psychological level of 4,000 points, the Shanghai index is now mid-way between last week's four-month low and a perceived ceiling of 4,500 points, a level under which a government-backed bailout fund, formed by 21 brokerages, has promised not to sell.

The CSI300 index rose 2.6 percent, to 4,211.81 points.

"This is victory in the first battles of a long-lasting war," said Hou Yingmin, analyst at brokerage Aj Securities.

"It takes time for market sentiment to fully recover from the recent trauma, which was so severe, and bears are likely to make a comeback anytime soon."

On Monday, the market sentiment was underpinned by China's June trade data, which was a surprise on the upside.

Shenzhen's ChiNext shares, which were the target of intensified selling during the market meltdown, rebounded sharply for a third consecutive session, up 4.9 percent.

The CSI300 banking index, however, fell 3.1 percent, a sign that buying interest in blue chips has waned.

(Reporting by the Samuel Shen and Pete Sweeney)