Sentiment also helped by hopes of economic reform during 'two sessions'
Stocks rallied on Tuesday, a day after the central bank cut the amount of cash that Chinese banks must
A strengthening yuan also overshadowed disappointing manufacturing data.
The benchmark Shanghai Composite Index rose by 1.68 percent to close at 2,733.17 points, heading for its biggest advance in a week.
The Shenzhen Component Index increased 2.47 percent, while the startup index ChiNext climbed by 2.91 percent.
Technology, materials and securities shares led the risers.
The daily amount of northbound trading through the Shanghai-Hong Kong Stock Connect program totaled 757 million yuan ($115.6 million) on Tuesday.
The required reserve ratio dropped by 0.5 percentage point on Tuesday.
"The easing signal from the RRR reduction will help lift market sentiment," said Gao Ting, head of China strategy with UBS Securities Co.
He added, with the approach of the "two sessions" - the annual meetings of the National People's Congress and the Chinese People's Political Consultative Conference - "market focus will shift to policy signals and supply-side reforms, and investor confidence could gradually recover".
Wendy Liu, chief China strategist at Nomura Securities Co, said the upcoming two sessions will strengthen investor confidence that Beijing is taking action on economic reforms.
Xu Lirong, chief investment officer at Franklin Templeton Sealand Fund Management Co, called the RRR cut a positive factor for the Chinese stock market, adding that levels are already through their worst and that he expected a 10 to 20 percent rebound in the short term.
"People are overly panicky," said Xu.
"I am still quite bullish on the Chinese economy and the A-share markets on the one-to-three-year horizon."
Xu said he planned to buy new economy stocks that could benefit from economic transformation, as well as those in old economy sectors such as commodities.
The yuan climbed 0.2 percent to 6.5416 yuan/dollar in Shanghai after the People's Bank of China raised its reference rate by 0.1 percent to 6.5385, according to Bloomberg.
Chen Yulu, vice-governor of PBOC, said on Tuesday there is no foundation for yuan devaluation because its exchange rate will remain steady, based on its relation with a basket of currencies.
China's manufacturing activity contracted for a seventh straight month in February with the Purchasing Managers Index falling to 49, down from January's 49.4, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing on Tuesday.
Hong Hao, chief strategist at BOCOM International Ltd, said the weak PMI data were influenced by the Spring Festival and China's focus on infrastructure investment in the second half of last year, which cannot be quickly reflected on economic data.
"The economy and stock market are looking good long term. But the short term is less certain unless the fundamentals improve or important policies are announced," said Hong.
Li Xiang contributed to this story.
(China Daily USA 03/01/2016 page13)