An investor holding a pair of chopsticks has his lunch in front of an electronic board at the stock exchange in Shanghai June 4, 2007. China's main stock index tumbled 8.26 ercent or 330 points on Monday to close at 3670.40, adding to big losses suffered last week after the government hiked the share trading tax to cool speculation. [Reuters]

Chinese stocks rebounded in wild fluctuations on Tuesday, erasing part of the losses incurred in the last few days since the stamp tax hike on stock trading.

The benchmark Shanghai Composite Index gained 2.63 percent to close at 3,767.10 points. At one point in the morning, the index dived to as low as 3,404.15, a decrease of 21.57 percent from the record high set on May 29.

But the index picked up gradually in the afternoon trading and managed to finish in positive territory.

Tuesday's morning's fall followed an 8.26 percent drop in the previous session and a 6.5 percent fall last Wednesday. The tumbles came after the Ministry of Finance tripled the stamp duty to 0.3 percent last Tuesday, spooking many investors into panic selling.

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In a move seen as an attempt to restore investors' confidence, the China Securities Regulatory Commission (CSRC) has approved four new funds that will invest in Chinese stocks, according to an earlier report. Each of the funds would be allowed to raise as much as $1.3 billion for investment in Chinese shares.

"The approval of new funds has sent out a clear signal," said Galaxy Securities chief fund analyst Hu Lifeng, adding the speed at which the new funds were issued is an effective measure to adjust capital supply in the market.

When the market is in a downturn, regulators can increase the supply of new funds to hike capital inflow, which in turn stabilizes prices and boosts market confidence, Hu explained.

As another move to return stability to the market, the CSRC has asked the funds in the market not to engage in rapid buying and selling, but to stick to the principle of value investment.

Blue chip stocks led Tuesday afternoon's recovery. Sinopec, Asia's largest refiner, gained 6.15 percent to close at 14.49 yuan per share after falling its 10 percent daily limit on Monday. Chalco, the country's biggest aluminum producer, soared 7.65 percent to 21.39 yuan.

China Life gained 2.65 percent to 34.86 yuan, while the Industrial and Commercial Bank of China rose 1.80 percent to 5.08 yuan, followed by Bank of China, rising 1.76 percent to 5.19 yuan.

Trading was more active than Monday. Volume in the Shanghai Stock Exchange hit 179.21 billion yuan compared with Monday's 145.98 billion yuan, while turnover in Shenzhen stood at 93.53 billion yuan, up from 74.36 billion yuan on Monday.