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SHANGHAI (Reuters) - China's fragile stock markets ended sharply lower on Thursday as oil prices failed to sustain a bounce from 13-year lows and other Asian markets went into reverse.
With tumbling oil prices indicative of slowing global growth, in which China plays a central part, the benchmark Shanghai Composite Index ended down 3.2 percent.
That followed a morning of up and down trade as the market lived up to its reputation for volatility, with moves amplified by low volumes.
The index has slumped more than 18 percent in 2016 as China's currency has come under pressure and economic indicators have confirmed its declining growth, putting the world's second-largest economy at the foreground of global investors' concerns.
At this level, investors who bought back into the market at the lowest point after regulators arrested a 40 percent crash last summer are back to square one.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen shed 2.9 percent, taking its losses for the year to more than 17 percent.
Lu Jie, head of China research at Robeco Asia Investment Center, said there was a vicious cycle in the markets.
"China falls trigger declines in overseas markets, which in turn fuel further slides in China markets. Panic has been amplified," he said.
However, he said the market could stabilize around March, when Chinese leaders are expected to unveil policies to support the economy at the National People's Congress, and believed that 2,800 points could be the SSEC's floor for this year.
Shi Wei, who manages roughly 4 billion yuan ($608 million) at Shanghai-based hedge fund Broad Capital, said ample liquidity would prevent an extended bear market, but a poor economy means there's not much room to go up either.
"The investment strategy this year is to be brave enough to buy during slumps and quick to take profit during rebounds," he said.
China has come in for criticism that it has left markets confused about its policies, and occasionally its stated intentions such as keeping its currency stable have not always matched its actions.
At the World Economic Forum in Davos, International Monetary Fund director Christine Lagarde said China needed to communicate better with financial markets.
"There is a communication issue, which markets do not like," she said.
Fang Xinghai, vice chairman of the securities regulator, also at Davos, said China was learning to "communicate seamlessly" with the markets, which he said ought to do more to support the economy.
The yuan has had a volatile start to 2016, after depreciating about 5 percent since August.
After jolting global markets by allowing the currency to slide sharply early in January, the People's Bank of China (PBOC) has kept a steady course for the yuan's daily midpoint fix in the last two weeks.
Thursday's fix was barely changed at 6.5585 per dollar.
"The yuan is under depreciation pressure, but China has the ability to control its pace, and indeed the yuan has already stabilized," said David Dai, Shanghai-based investor director at Nanhai Fund Management Co.
A Reuters poll showed that bearish positions on the currency have eased a little in the last two weeks, deterred by the central bank's determined intervention.
In the spot market, the yuan was at 6.5788, just a few pips softer than Wednesday's close, while offshore it was nearly 0.5 percent weaker at 6.6084.
The central bank was also generous with liquidity ahead of the Lunar New Year holiday by injecting a net 315 billion yuan ($48 billion) into the banking system for the week to avoid a cash crunch during the long holiday.
It was the biggest weekly injection since January 2014, and came on top of other recent PBOC moves to avert any undue strains in coming weeks.
The PBOC has acted aggressively to deter speculators from shorting the yuan, also known as the renminbi (RMB), but the yuan's bumpy fall in the past six months, heavy capital outflows and a cooling economy have reinforced market expectations that something will have to give.
Speculators have taken to using the yuan's cheaper offshore forwards market to wager China will finally devalue the currency around March or April.
China's foreign exchange regulator said on Thursday that net capital outflows had eased in the fourth quarter last year, and risks were under control.
Hao Hong, Managing Director at Research BOCOM International, said the consequences of China's attempts to manage its currency and support its stocks were spilling over into Hong Kong.
"Interventions in mainland assets such as the RMB and A-shares have prevented market prices from adjusting toward China’s deteriorating fundamentals, and forced volatility to manifest in Hong Kong assets," he said.
The Hong Kong dollar fell to its lowest in more than eight years on Wednesday as the market tested the city's long-standing peg to the U.S. dollar, though the currency was steady on Thursday.
Hong Kong's Hang Seng share index, however, dropped another 1.5 percent to plumb lows not seen since August 2012.
($1 = 6.5750 Chinese yuan renminbi)
Reporting by Pete Sweeney, Samuel Shen and Shanghai and Beijing newsrooms; Writing by Wayne Cole and Will Waterman; Editing by Kim Coghill & Shri Navaratnam