(Bloomberg) -- Chinese stocks staged a sharp recovery in afternoon trading, with a spike in volumes for an exchange-traded fund tracking state-owned shares fueling speculation of buying by state funds.  

The CSI 300 Index reversed all of its 1.6% loss to close 0.6% higher. The Hang Seng China Enterprises Index narrowed its decline after sliding almost 3% earlier. 

The sudden rebound coincided with a jump in trading activity for the China Southern CSI Guoxin Central-SOEs Technology Lead exchange traded fund. Investors have been tracking the ETF for signs of state buying after China Reform Holdings Corp. said earlier this month that one of its units had bought an unspecified amount of an ETF tracking the index and planned to increase its holding in the future.

Yu Yingbo, investment director at Shenzhen Qianhai United Fortune Fund Management Co., said China Reform was likely again in action, and added other state-related funds may have also ramped up stock purchases. 

“It seems like the state is trying to make the best use of its existing framework to do the buying,” he said. 

READ: Activity in China State Fund’s Favorite ETF Signals More Buying

An email sent to China Reform Holdings seeking comments didn’t immediately get a response. 

Meanwhile, a leading Chinese macro hedge fund said now is a “once-in-two-decades opportunity” to invest in the stock market. Li Bei, founder of Shanghai Banxia Investment Management Center, said in a November monthly report that her fund is “decisively increasing its positions,” according to Cailian.  

Stocks have continued to slide in December after sitting out the global equities rally last month. Monday’s earlier declines suggest the Politburo meeting, which many had looked to for fresh momentum, has disappointed. Policymakers pledged to strengthen fiscal support but dropped the wording “forceful” when mentioning monetary policy. 

Data over the weekend also showed consumer prices dropped at the steepest pace in three years, deepening worries over the economy’s strength. 

READ: Big China Hedge Fund Touts ‘Once-in-20-Year’ Chance in Stocks

A Bloomberg Intelligence index of Chinese brokerage shares, seen as a gauge of investor sentiment, also rebounded in the afternoon to advance more than 1%.

A selloff by foreign investors eased as shares rebounded. Overseas funds withdrew 3.3 billion yuan ($459 million) of mainland stocks via trading links with Hong Kong as of market close, narrowing from nearly 10 billion yuan earlier.  

The focus will now be whether the notable rebound will have staying power. A similar intra-day move seen on Dec. 1 failed to last as pessimism over China’s economy continued to take center-stage. 

--With assistance from April Ma.

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