China stocks jump on U.S. rally, yuan edges up

By Pete Sweeney and Samuel Shen HONG KONG/SHANGHAI (Reuters) - China's turbulent stock markets rose sharply on Thursday, helped by a strong rebound on Wall Street on expectations that the U.S. Federal Reserve will respond to days of China-led volatility by delaying an expected interest rate rise next month. Chinese stocks had fallen again on Wednesday - taking their losses to more than 20 percent in just five days - underscoring fragile investor confidence and deep doubt over whether the previous day's policy easing by the People's Bank of China's (PBOC) could stabilise the economy. Concerns about China's slowing growth have been rising all year with a constant drip-feed of deteriorating economic data, including an official purchasing managers' survey last week suggesting that factory activity shrank this month at its fastest pace in almost 6-1/2 years. A Reuters poll of August manufacturing activity on Wednesday confirmed a rapid slowdown. An unexpected devaluation of the yuan two weeks ago added to suspicions that Beijing was worried about its exporters, which have led its breakneck growth for two decades. The yuan edged up against the dollar on Thursday, buoyed by the rise in stocks, though the PBOC set the daily guidance rate, from which the spot rate can vary by up to 2 percent, at its lowest level since 2011. "The recovery on the yuan may be just a flash," said a trader at a foreign bank in Shanghai. "Many companies and big investors are worried about the prospect of the currency's depreciation." Late on Tuesday the PBOC cut interest rates and freed up banks to lend more, but that stimulus had failed to convince local stock markets of Beijing's ability to reverse the slowdown in the world's second biggest economy. "FANTASY GROWTH"? Markets in New York had also been unimpressed by China's efforts to calm investors' nerves, until New York Fed President William Dudley said the prospect of a September rate hike seemed "less compelling" than it was just weeks ago. That fuelled a 3.95 percent rise in the Dow Jones Industrial Average, its biggest one-day gain in four years, which carried over into Asia. The CSI300 index of the biggest stocks in Shanghai and Shenzhen was up 5.95 percent at the close, and the Shanghai Composite Index rose 5.4 percent. Futures contracts on the CSI300 were up 7.3 percent at 3,030, but still more than 5 percent below the underlying index, which suggests investors expect further weakness. Not all, however. "From today, I'm no longer pessimistic," said Jiang Chao, a strategist at Haitong Securities, who correctly predicted China's year-long bull run, which ended in mid-June. China's two main stock indexes have never been reliable barometers of the domestic economy and unlike most developed-world bourses are dominated by retail investors, which makes them particularly volatile, but the weight of worsening economic news finally helped bring an end to the bull run. Even if China hits its official target of 7 percent growth this year that will still be its slowest pace of expansion in 25 years. Many economists suspect that the official figures are too optimistic. On Thursday, one of China's richest men, Wang Jianlin, chairman of property and investment firm Dalian Wanda, said China should give up the "fantasy" of 7-8 pct economic growth and accept a slower rate that was "sustainable and safe". For all that, a majority of economists predict a continued deceleration - rather than a crash - for China's economy, and most dismiss comparisons with the 2008 global financial crisis or the 1997/98 crisis in Asia. Japan's central bank governor Haruhiko Kuroda said on Wednesday that market players had become "too pessimistic" about China, and he expected its growth would likely remain at 6-7 percent this year and next and would not have a very negative impact on Japanese exports. (Additional reporting by Shu Zhang and Matthew Miller; Writing by Will Waterman; Editing by Alex Richardson)