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Updated Wednesday, September 2, 2009 11:14 am TWN, Bloomberg

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China's stock index rises after huge drop

SHANGHAI -- China's benchmark stock index rose, following its biggest drop since June 2008, as financial companies gained on speculation recent declines were excessive and as the country's manufacturing expanded.

Bank of China Ltd. added 1.9 percent, climbing from a three-month low. China Life Insurance Co. advanced 4.3 percent, snapping a three-day retreat, after UBS AG raised its rating on the stock. Jiangxi Copper Co. slid 4.3 percent, leading losses by commodity producers, after metal prices fell. Zhongjin Gold Corp. declined 5 percent. The Shanghai Composite Index rose 15.98, or 0.6 percent, to 2,683.72 at the close, after swinging between gains and losses more than 10 times. The gauge plunged 6.7 percent Monday and entered a bear market on concern a slowdown in lending growth may derail a rebound in the world's third-largest economy. The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, gained 0.5 percent to 2,843.70.

“Investors are watching to see what the government's policies on liquidity will be,” said Zhao Zifeng, who helps oversee about US$10.2 billion at China International Fund Management Co. in Shanghai.

“China's economy appears to be recovering, but any sign that the pace of recovery is slowing would leave the market very vulnerable.”

Manufacturing expanded at the fastest pace in 16 months in August, driven by record lending in the first half of the year, two surveys showed.

An index of 50 financial stocks on the CSI 300 rose 2.5 percent, the biggest contributor to gains and rebounding from a three-month low.

“Stocks are cheap now relative to the current economic fundamentals,” said Zhang Kun, a strategist at Guotai Junan Securities Co. in Shanghai. “It'll be a good opportunity to buy equities when the market stabilizes.”

The Shanghai gauge slumped 22 percent in August, the worst monthly performance since October, as banks reined in lending to avert asset bubbles and policy makers advised industries such as steel and cement to curb overcapacity. The decline stopped a rally that had sent the measure up 103 percent from a November low on prospects the government's 4 trillion yuan (US$586 billion) stimulus program and a record amount of new loans will ensure the economy grows at least 8 percent this year.

New loans plunged to 355.9 billion yuan in July, less than a quarter of June's level, and may slump to 200 billion yuan in August, the Beijing-based business magazine Caijing reported Monday without citing anyone.

The Shanghai Composite may fall another 25 percent as China's economic recovery isn't “sustainable,” former Morgan Stanley Asian economist Andy Xie said.

“The market is in deep bubble territory,” Xie, 49, who correctly predicted in April 2007 that China's equities would tumble, said in an interview with Bloomberg Television Monday.

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