* CSI300 drops 2.5 pct at open,
* CSRC, PBOC intervene to restore confidence
* PBOC injects $20 bln to money markets, intervenes in yuan mkt
* Investors still see room for more slides
By Pete Sweeney and Samuel Shen
SHANGHAI Jan 5 (Reuters) - China stocks rose on Tuesday as financial regulators and the central bank moved aggressively to restore confidence a day after a plunge roiled global markets.
Stocks fell more than 2 percent in early trade, prompting fears that exchanges were set for a second day of panic selling after a 7 percent dive on Monday set off a new "circuit breaker" mechanism, suspending trade nation-wide.
But stocks soon moved back into positive territory thanks to a mixture of policy intervention and hard cash.
The CSI300 index was up 0.8 percent at 3,496.50 points by midday, while the Shanghai Composite Index gained 0.4 percent to 3,309.92.
Signs of steadying in mainland markets also soothed jangled nerves in Hong Kong, where the Hang Seng index was little changed after a 2.7 percent drop on Monday.
China's central bank injected a massive $20 billion in cash through open market operations in the morning, and forex traders said it also intervened to stabilise the sliding yuan, which some blamed for aggravating Monday's slump.
For its part, the China Securities Regulatory Commission (CSRC) said it was considering more restrictions on share sales by major shareholders, a major concern for small investors.
A lockup on an estimated 1.2 trillion worth of shares held by major institutions, imposed as a stability measure during last summer's market crash, is set to expire next Monday.
The CSRC said it would guide major shareholders and senior executives to reduce shares through block trades and negotiated transfers, which it said would enable an "orderly exit" of emergency measures.
Major Chinese brokerages and asset management firms spent vast sums to buy up shares during the crash in a state-coordinated rescue that Goldman Sachs estimated at the time to have cost around $138 billion.
The CSRC also said it would further improve the circuit breaker mechanism after some analysts blamed the tool for inadvertently fueling the sell-off.
Monday's plunge threatened Beijing's six-month campaign to restore confidence in stock markets since the summer crash, which saw indexes lose as much as 40 percent in a few weeks.
However, long-term success is far from assured, analysts and investors warned.
Repeated and often heavy handed interventions by Beijing have kept stock valuations at what many consider excessively high given the slowing economy and falling corporate profits.
"We've been waiting for a market drop like this for a long time," said Samuel Chien, a partner of Shanghai-based hedge fund manager BoomTrend Investment Management Co.
"The economy is poor, stock valuation is still high, and the yuan keeps sliding, showing capital outflows are accelerates. The market drop is overdue."
Market reforms put on hold by the crash could be delayed further if the circuit breaker fails to calm markets - which had rebounded over 25 percent from August lows prior to Monday.
A further sell-off could prompt regulators to freeze IPOs again, extend the share lockup to prevent more selling and keep the "national team" of brokerages and asset managers on the hook to keep buying and holding stocks at a loss.
It could also further dent confidence in the China Securities Regulatory Commission and in the wider financial regulatory framework to manage increasingly complex markets even as China's economy struggles against major headwinds.
The experience has further rattled some retail investors - who dominate transactions on Chinese exchanges.
"I think the circuit-breaker system is useless, the market will slump anyway," said Zhou Junan, a 22-year-old retail investor, who said he's holding back from buying stocks until later in the year. ($1 = 6.5197 Chinese yuan renminbi)
Additional reporting by Nicola Saminather and the Shanghai Newsroom; Editing by Kim Coghill