China shares rebound Tuesday on short selling curbs

China's stocks market ended a three-day losing streak on Tuesday amid new rules restricting short selling.

The benchmark Shanghai Composite Index surged 3.69 percent to close at 3,756.54 points.

The smaller Shenzhen Component Index gained 4.52 percent to close at 12,711.56 points. The ChiNext Index, tracking China's Nasdaq-style board of growth enterprises, soared 6.12 percent to end at 2,546.16 points.

Turnover on the two bourses rose to 906.47 billion yuan (148.18 billion U.S. dollars) from 848.3 billion yuan the previous trading day.

Military and aviation companies were among the biggest winners while recently listed shares lost the most.

The gain came after the release of new rules that prohibit short sellers from borrowing and covering the shares on the same trading day.

According to statements released by the Shanghai and Shenzhen stock exchanges after Monday's trading session, investors must wait for the next trading day to pay back the stocks they borrowed, adding to the uncertainty of the profits investors may lock in.

The so-called T+1 rule is aimed at avoiding market volatility caused by speculative same-day trading and will not be a threat to the healthy development of the short selling business, according to the Shenzhen stock exchange.

Responding to the new rule, five major brokers including CITIC Securities and Huatai Securities said in statements that they would suspend short selling activities of their accounts from Tuesday.

In a short-sale, speculators sell shares borrowed from lenders and buy back the stocks to cover the position at a later time in the hope that share prices will fall during the period so they can earn the difference.

The new rule came after a chain of actions by the regulators aimed at stabilizing the stock market, including freezing 38 accounts with trading irregularities and curbing automated trading.

The government also poured in funds to prop up the market and froze large shareholders from selling.

The rescue funds are not likely to be pulled in the short term, according to Xu Biao, chief strategist with Essence Securities, who's bullish on the market in August.

The demand for stocks will remain high with brokers holding the rescue fund and pensions entering the stock market, Xu said, adding that much of the money in privately offered funds are still untapped and may also boost demand.