* CSI300 +0.7 pct; SSEC +0.7 pct; HSI +0.7 pct;
* Brokerage shares jump on prospects of Shanghai-London Connect
* ChiNext shares still expensive after slump - analyst
SHANGHAI, Sept 22 (Reuters) - China stocks edged higher on Tuesday morning as strength in blue chips countered a pullback in small cap shares, in a further sign of improving market stability.
Hong Kong shares were also firmer, taking cues from an improving outlook in global markets.
China’s blue-chip CSI300 index rose 0.7 percent, to 3,331.42 points at the end of the morning session, while the Shanghai Composite Index gained 0.7 percent, to 3,177.02 points.
China’s volatility index, a gauge of investor fears, has dropped to 40 percent from an August peak of 64 percent.
But some analysts warn that with valuations of small stocks still high, and the Chinese economy yet to find its feet, the rebound could be temporary.
“Remember we’re still in a bear market,” said Chang Chengwei, index futures analyst at brokerage Hengtai Futures.
“What we’re seeing is just a technical rebound,” he said, adding that the U.S. decision to hold rates unchanged, and Beijing’s recent market-soothing messages had created a “window of opportunity”.
But investors are nervously looking to China’s flash factory activity survey on Wednesday for clues on whether the economy is deteriorating more rapidly than earlier thought.
The Asian Development Bank forecast that China’s growth will cool to 6.8 percent this year, missing a government target of around 7 percent, and will slow further to 6.7 percent in 2016.
“We continue to give a low rating to the market, holding a relatively bearish view on price trends,” said Wei Fengchun, strategist at Bosera Asset Management, citing a big reduction in outstanding margin loans last week, and signs of investors fleeing the market.
Blue chips rebounded on Wednesday morning, led by banking shares, as some investors think the sector - trading at 6.3 times earnings on average - is already cheap.
But small caps corrected following Monday’s strong gains. Shenzhen’s start-up board ChiNext lost 0.4 percent by midday.
ChiNext, which currently trades at an earnings multiple of 77.6, is still expensive, although valuation has almost halved from a multiple peak of 140 in mid-June.
Brokerage shares, including CITIC Securities and Haitong Securities, jumped as investors bet securities firms would benefit from a possible market link-up between Shanghai and London.
In Hong Kong, the Hang Seng index added 0.7 percent, to 21,913.70 points, while the Hong Kong China Enterprises Index gained 0.5 percent, to 9,951.89. (Reporting by Samuel Shen and Pete Sweeney; Editing by Jacqueline Wong)