SHANGHAI, June 30 (Reuters) - China's efforts to stave off a crash in the world's most volatile stock market showed signs of gaining traction on Tuesday, with indexes rallying sharply on signs of intensifying government support.
Chinese equity markets have fallen more 20 percent from their peak in mid-June, when a rally fuelled by expectations of further monetary easing from the People's Bank of China (PBOC) shuddered to a halt.
On Monday main indexes dropped a stomach-churning 7 percent before a sudden reversal, while Tuesday stocks slid again in early trade before reversing course dramatically for no apparent reason.
Beijing has already enacted a suite of measures that appear targeted at stabilising sentiment in a market dominated by individual retail investors prone to mood swings, but it appears to be signs of direct government support to the market through share purchases that have finally revived the rally.
On the liquidity front, the central bank made multiple monetary easing moves last week and over the weekend, including cutting rates and reducing or eliminating banks' reserve ratios.
Regulators also said they would allow the National Social Security Fund (NSSF) to buy more stocks, which could ultimately result in more funds entering the market.
None of that appeared to have much effect, but signs of large cash inflows into Chinese ETFs, combined with rumours of other behind-the-scenes "window guidance" to institutional investors, seem to have triggered a sharp rally in the afternoon.
The CSI300 index was up 6.2 percent to 4,449.76 points at 0610 GMT, while the Shanghai Composite Index gained 5.1 percent to 4,258.30 points.
A note from the Asset Management Association of China, a state-run body, said that the correction has created "valuable buying opportunities for mature and rational investors", echoing articles in state financial media predicting a quick return to a bull market.
But Chinese investors are used to such consoling rhetoric in the past and past experience has showed such forced rallies can have limited durations.
"The lesson from China's last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect," wrote Mark Williams, economist at Capital Economics, in a research note.
In the past Chinese state-owned asset management companies such as Central Huijin have intervened to buy or sell shares en masse to stabilise sentiment, and investors suspect that a recent surge of money into Chinese exchange traded funds (ETFs)is in fact coming from government coffers.
Intensive subscriptions were seen on Monday for the four major ETFs - China AMC 50 ETF, Huatai-PB CSI300 ETF , China AMC CSI300 ETF and Hua An Shanghai 180 ETF, exchange data showed.
Whether Beijing ultimately turns the tide is under debate, but few question its ability to muster further firepower if necessary.
But if China is forced to rely on monetary policy to prop up the stock market, it risks not having much ammunition left to fight off other economic shocks, in particular a collapse in European demand as a result of a Greek exit from the euro zone. (Editing by Alex Richardson)