* Shanghai shares up 2.7 pct, biggest gain since May 2016
* CSI300 gains 2.92 pct, biggest gain since August 2016
* China Railway Corp says China to spend more on railways this year
* Yuan strengthens in afternoon trade on firmer fixing
By Andrew Galbraith and Luoyan Liu
SHANGHAI, Aug 7 (Reuters) - Shares in China rebounded on Tuesday following a heavy four-day selloff, as investors picked up battered stocks while infrastructure firms were bolstered by expectations of increased spending on public works projects.
The Shanghai Composite index jumped 74.14 points, or 2.7 percent, at 2,705.16.
That was its biggest daily gain in percentage terms since May 2016 and follows a decline of about 6 percent over the previous four trading sessions as an escalation in the U.S.-China trade war rattled confidence in Chinese markets.
Zhu Junchun, an analyst with Lianxun Securities, said gains were led by infrastructure firms that are expected to benefit from economic stimulus, which includes increased spending on public projects, but noted there were questions about how sustainable the day’s rally would be.
“This is a technical rebound in nature after the sharp fall last week, though it’s hard to say whether the downward correction for the major indexes is over yet,” said Zhu.
Among infrastructure stocks, China Railway Corporation shares rose by the daily maximum of 10 percent.
China Railway was reported in domestic media as saying China would boost its fixed asset investment in railways to 800 billion yuan ($116.85 billion) in 2018, an increase of 9.3 percent over its original plan.
The boost in railway spending comes alongside a broader shift in fiscal policy to support economic growth. On Tuesday, an adviser to China’s central bank called for stronger policy coordination to better serve smaller firms.
China’s cabinet has previously called for a more active fiscal policy, including cutting taxes for companies and boosting the pace of local governments’ special bond issuance to help finance projects. Beijing has also said it will keep its economic growth in a reasonable range by making policies more flexible and effective.
The blue-chip CSI300 index was up 2.92 percent, its biggest percentage jump since August 2016.
Its financial sector sub-index rose 2.64 percent, the consumer staples sector gained 2.76 percent, the real estate index jumped 3.8 percent and the healthcare sub-index ended 1.85 percent higher.
Shares in healthcare and consumer firms have been hit hard in recent days amid a scandal over vaccines that has undermined consumer confidence, while property firms have suffered from expectations of measures to rein in property prices.
The smaller Shenzhen index ended up 2.75 percent and the start-up board ChiNext Composite index was higher by 2.68 percent.
Despite Tuesday’s surge, the Shanghai stock index is down 16 percent this year, while the CSI300 has fallen 16.4 percent.
The yuan strengthened in afternoon trade against the U.S. dollar Tuesday, reversing earlier losses. But traders said the outlook for the currency remains bearish.
At 0712 GMT, the yuan was quoted at 6.8385 per U.S. dollar, 134 pips firmer than the previous close of 6.8519.
The yuan’s rise followed a firmer midpoint for the currency’s daily trading band set by the PBOC of 6.8431 per dollar, 82 pips stronger than the previous day’s fixing of 6.8513. ($1 = 6.8464 Chinese yuan) (Reporting by Andrew Galbraith and Luoyan Liu; Editing by Sam Holmes)