China blue-chips pull back after sharp rally; Hong Kong down

* SSEC 0.4 pct, CSI300 -0.1 pct, HSI -0.5 pct

* HK->Shanghai Connect daily quota used 2.3 pct, Shanghai->HK daily quota used -1.6 pct

* FTSE China A50 -1.3 pct, BNY Mellon ADR China Select Index +1.7 pct

SHANGHAI, Feb 26 (Reuters) - Chinese stocks were choppy on Tuesday, with blue-chips pulling back as investors paused for breath after hopes of a trade deal with the United States set off a spectacular rally on the previous day.

Optimists hailed Monday’s nearly 6 percent jump in the blue-chip CSI300 Index - the biggest one-day gain in three years - as the starting shot of a new round of bull run.

“The surge marks the official start of a full-blown bull market,” said Yang Delong, managing director at First Seafront Fund Management Co, which has been adding stock positions since last October.

But sceptics say it’s merely a short-term rebound.

“Further rise will be capped by still-deteriorating corporate profit,” said Ma Tao, strategist at Caitong Securities.

The CSI300 index moved roughly 1 percent on either side before settling down 0.1 percent at 3,724.85 points by midday break, while the Shanghai Composite Index gained 0.4 percent, to 2,973.71 points.

China stocks are up about one fifth this year, driven by a combination of factors including progress in Sino-U.S. trade talks, Beijing’s monetary easing and fresh foreign money inflows.

“What doesn’t kill me, makes me stronger,” said Pan Jiang, CEO of money manager Shanghai V-invest Co said, referring to the Sino-U.S. trade war.

Pan added that a deal between the countries could potentially make China more competitive in the long run, by speeding up domestic reforms.

U.S. President Donald Trump said on Monday he may soon sign a deal to end a trade war with Chinese President Xi Jinping if their countries can bridge remaining differences, saying negotiators were “very, very close” to a deal.

There are signs risk appetite is rapidly improving, while some investors are scrambling to buy stocks for fear of missing out on the rally.

Outstanding margin financing business at brokerages has been climbing steadily this month, while investors have also been borrowing money in the grey market to buy equities, drawing the attention of regulators.

Late on Monday, China’s securities watchdog urged stricter monitoring of unusual stock trading after reports of increasing grey-market margin financing.

There are also signs some investors are starting to take profit.

Foreign investors on Monday sold a net of 715 million yuan ($106.82 million) worth of A-shares via the stock connects linking mainland and Hong Kong, snapping a 18-session net buying streak which helped power the Shanghai composite index to a more than eight-month high.

Capital Economics said the underlying economics risks didn’t justify Monday’s rally.

” Although an agreement to end the trade war with the U.S. would be good news for China, we doubt that it would prevent the country’s economy from weakening further,” it wrote on Tuesday.

Financial firms, in particular banking stocks led the decline on Tuesday, after Beijing ordered banks and insurers to sharply step up lending to private firms.

The CSI China mainland banks index dropped 1.6 percent by the lunchbreak.

Concern about China’s debt is rising again as Beijing ramps up support for a slowing economy. New bank loans hit a record in January despite increasing bad loans and record defaults in 2018.

In Hong Kong, the Hang Seng index dropped 0.5 percent, to 28,810.62 points, while the Hong Kong China Enterprises Index lost 0.3 percent, to 11,592.58. ($1 = 6.6937 Chinese yuan renminbi)

Reporting by Samuel Shen, Luoyan Liu and John Ruwitch; Editing by Shri Navaratnam