China stocks reverse losses after central bank extends more loans

SHANGHAI (Reuters) - Chinese stocks reversed sharp declines and ended higher on Wednesday after the central bank injected more funds into the financial system for a second day in a bid to calm panicky markets.

The move by the People's Bank of China (PBOC) helped offset fears that the government is considering scaling back its massive rescue effort for the country's stock markets which it put in place just last month.

The CSI300 index rose 1.6 percent, to 3,886.14, while the Shanghai Composite Index gained 1.2 percent, to 3,794.11 points.

The indexes had slumped more than 5 percent at one point in morning trade, after plunging 6 percent on Tuesday following comments by China's securities regulator that the market has normalised and the government would allow market forces to play a bigger role in determining stock prices.

But some analysts said the correction was overdone.

"The regulator's announcement referred to a decrease in the buying rate rather than any sales of holdings, which would seem to indicate that investors are once more overreacting," wrote Gerry Alfonso, director of Shenwan Hongyuan Securities Co.

Indeed, some investors took advantage of the slump to buy relatively cheaper shares, triggering a late-afternoon rebound.

The market was also encouraged by news that the central bank would offer selected banks new medium-term lending facility (MLF) loans in a bid to offset tightened liquidity conditions following the sharp devaluation of the yuan last week.

On Tuesday, the central bank injected 120 billion yuan ($18.77 billion) into the money markets through seven-day reverse bond repurchase agreements. It was the largest injection since the week of Feb. 9.

Some analysts suspect government funds also played a role in the market's late-hour rise.

An index tracking stocks partly owned by the state margin lender China Securities Finance Corp (CSFC) ended up 3 percent, after falling over 4 percent in earlier trading.

Regulators have said that CSFC, which was tasked with buying stocks and proping up prices during the recent market sell-off, would continue to play a stabilising role in the market.

Guangdong Meiyang Jixiang Hydropower Co, which counts CSFC as an investor, slumped 6.4 percent at midday but surged 10 percent by the market close.

Fujian Mingdong Electric Power swung from its 10 percent downward limit, to its 10 percent upward limit in a dramatic reversal of fortune.

Most sectors, including banks, real estate and healthcare reversed losses and climbed at the end of the session.

(Reporting by Samuel Shen and Pete Sweeney; Editing by Kim Coghill)