SHANGHAI: Chinese shares rose on Monday, rebounding from a sharp sell-off last week that had been prompted by fears of policy tightening, but gains were capped after China's factory activity grew at a slower pace in February.

At the midday break, the Shanghai Composite index was up 0.52% at 3,527.30. The index fell more than 5% last week, its biggest weekly drop in a year.

China's blue-chip CSI300 index added 0.79%, with the consumer staples sector up 1.28%, the real estate index up 0.45% and the healthcare sub-index up 0.57%.

"There has been a sharp shift in market sentiment after the recent correction. We expect market volatility to intensify in the short term. It could take investors some time to re-price domestic policy normalisation, a global economic recovery and rising global rates," analysts at UBS said in a note.

China's factory activity expanded in February at a slower pace than a month earlier, hitting the lowest level since last May and missing market expectations after COVID-19-related disruptions earlier in the year.

The rare earth index jumped 5.02%, as China's industry minister Xiao Yaqing said that underpricing the materials would lead to a race to the bottom.

Chinese H-shares listed in Hong Kong rose 1.27% to 11,390.39, while the Hang Seng Index was up 1.2% at 29,328.38, supported by a 3.3% gain in the IT sector.

The smaller Shenzhen index was up 1.61%, the start-up board ChiNext Composite index was 1.87% higher and Shanghai's tech-focused STAR50 index gained 1.79%?.

The yuan traded at 6.4635 per US dollar, 0.07% firmer than the previous close of 6.4681.

The Shanghai stock index has gained 1.6% so far this year? and the CSI300 has risen 3.2%, while the H-share index in Hong Kong is up 6.1%.