Hong Kong shares rebound, short covering lifts China coal
* HSI +1.8 pct, H-shares +2.1 pct, CSI300 +0.2 pct
* Short covering propels Hong Kong gains before key events
* HK volumes light ahead of U.S. July 4 holiday
* Biostime plunges as foreign rivals cut China milk power prices
HONG KONG, July 4 (Reuters) - Hong Kong shares were on track for their first gain in three days, with China markets also rebounding, as investors covered short positions ahead of a European Central Bank meeting later Thursday and a U.S. payrolls report on Friday.
Investors cut bearish positions to avoid being caught offguard by any surprises from the ECB meeting, which is expected to leave interest rates unchanged. Weaker than expected U.S. jobs data could ease jitters about the Federal Reserve tapering its aggressive monetary easing.
At midday, the Hang Seng Index was up 1.8 percent at 20,501.2 points, while the China Enterprises Index of the top Chinese listings in Hong Kong climbed 2.1 percent. If gains hold, this will be their first gain in three sessions.
The Shanghai Composite Index was up 1 percent, while the CSI300 of the leading Shanghai and Shenzhen A-share listings rose 1.4 percent after starting the day down almost 1 percent.
On Wednesday, both suffered their worst daily loss in two weeks, with short selling hitting 14.1 percent of total turnover. That was the 11th-straight session that shorts exceeded 10 percent, compared with the historical 8 percent average.
But gains in Hong Kong came in weak turnover, with traders citing the July 4 Independence Day holiday in the United States.
"We are going to get these rebounds, but the general trend for Chinese equities in the foreseeable future is down for as long as a bottom in China growth is unclear," said Francis Cheung, CLSA's China-Hong Kong equity strategist.
"But with data perpetually weak, it may be getting risky to stay too short. I will be very surprised if Beijing doesn't act if the official PMI stays below 50 for two straight months," Cheung added.
Shares of China coal producers were among the biggest index boosts in Hong Kong. China Coal Energy climbed 4.1 percent after having closed on Wednesday at its lowest since November 2008. Short selling for its H-share listing averaged nearly 35 percent in the 10 sessions before Thursday.
Shares of the mainland's biggest coal producer, China Shenhua Energy , jumped 5.9 percent and appeared set for its best daily gain in 10 months in Hong Kong. Its A-share listing in Shanghai was up 3.1 percent.
China Petroleum and Chemical Corp (Sinopec) jumped 3.1 percent after its subsidiary Sinopec Shanghai Petrochemical posted positive results for the first half of the year, recording a profit in May and June. Sinopec Shanghai's shares were also up more than 3 percent.
Shares of Biostime, the Chinese milk powder producer which has confirmed it is part of an anti-trust probe in the mainland, followed Wednesday's 13 percent plunge with another 13.2 percent slide in heavy volumes.
Swiss food company Nestle and France's Danone , two foreign competitors also under investigation, said late on Wednesday they were cutting the price of infant formula milk in China.
BANKS HELP A-SHARES REVERSE EARLY LOSSES
Mainland China markets reversed early losses, led by the Chinese banking sector. Mid-sized China Minsheng Bank went into the lunch break up 1 percent, reversing losses of nearly 2 percent.
The Chinese central bank issued no bond repurchase agreements on Thursday, suggesting it will inject a net 46 billion yuan into the market this week, compared to the 25 billion yuan last week. It also issued no repos or bills this week.
China's economy is expected to grow 7.6 percent in the second half of 2013, but risks from bad local government loans, slowing growth of central government revenue and diminished export competitiveness are increasing, the official China Securities Journal reported on Thursday.
Beijing is due to release a slew of June economic data next week, including new loan growth, money supply, inflation and trade. Second quarter GDP is expected on July 15, as are data for industrial output, urban investment and retail sales.