* Yuan hits 6.8128 per dollar in onshore trade Friday
* Worst 90-day fall for yuan since 1994
* China shares rebound on reports of new wealth management rules
By Winni Zhou and Andrew Galbraith
SHANGHAI, July 20 (Reuters) - China's yuan rebounded from more than one-year lows against the dollar on Friday afternoon, driven up on suspected dollar sales by major state banks to prop up a currency that has been hit by a bitter Sino-U.S. trade conflict.
The frenetic action in the currency market was matched by some sharp gyrations in the country's stock markets, which recovered from early losses to close solidly higher amid reports of the imminent release of detailed rules governing the wealth management industry.
Markets were already tense in early trade after U.S. President Donald Trump told CNBC on Thursday U.S. time that a strong dollar puts the United States at a disadvantage and that the Chinese yuan "was dropping like a rock."
Beijing's currency management has been a sore point in relations between China and the United States in the past, so any suspicions that Chinese authorities might be deliberately weakening the yuan could further inflame tensions between the two countries.
The latest bout of yuan weakness, catalysed by concerns over the brewing trade war and a slowing Chinese economy, has seen it shed 7.5 percent of its value against the dollar since the end of the first quarter of this year - its biggest 90-day fall since the market exchange rate was unified in 1994.
Since a shock devaluation of the yuan by Beijing in 2015 triggered a sharp slide in the currency and rattled global markets, Chinese authorities have been at pains to keep the yuan largely stable to prevent a destabilising flight of capital.
Friday's yuan fixing of 6.7671 per dollar was the lowest since July 14, 2017, and represented the biggest one-day weakening in percentage terms since June 27, 2016.
The midpoint largely matched market forecasts, traders said, an indication that the authorities did not appear eager to hit the brakes on the yuan's fall.
Later, though, four traders said they had seen major state-owned banks selling dollars and propping up the yuan.
"Big banks were offering dollar liquidity onshore and offshore, instead of only selling onshore as what they used to do. In this case, it could have better effect," said one of the traders.
Another trader said he saw state banks selling dollars onshore at around 6.81 per dollar. The dollar selling had the effect of causing the yuan to pull back from its downhill dash.
After falling to a low of 6.8128 per dollar, the yuan recouped its losses in the afternoon. The yuan finished its onshore trading session at 6.7795 to the dollar, the weakest such close since July 14, 2017, 1 pip firmer than the previous late session close.
Offshore the yuan was trading 0.2 percent softer than the onshore spot at 6.7955 per dollar.
Some traders said dollar liquidity offered by the big state-owned banks in the morning halted the sharp decline in the yuan, causing it to reverse course.
The Shanghai Composite index closed 2 percent higher Friday, after earlier dropping 0.7 percent. The blue-chip CSI300 index ended 1.9 percent higher, turning around from a 0.9 percent drop.
Traders attributed the moves to a report by the 21st Century Business Herald that China will soon publish detailed rules on banks' wealth management products (WMPs).
The newspaper said it was unclear whether the threshold for WMPs will be lowered, or whether WMPs will be allowed to invest in the secondary market. All the same, investors saw it as a sign that rules will be less rigid than expected, helping drive banking shares up by more than 4 percent.
Reuters was not able to independently verify the report. The China Banking Regulatory Commission and People's Bank of China did not immediately respond to requests for comment.
The turnaround in stocks saw Chinese government bond futures fall, with Chinese 10-year treasury futures for September delivery, the most traded contract, dropping as much as 0.9 percent on the day. They were last 0.8 percent lower at 95.725.
A fixed-income trader in Shanghai said that the sharp drop in treasury futures reflected an expectation that the new WMP rules would be bullish for stocks and riskier assets.
"(Prices of) Chinese government bonds have been going up for a long time. Many people want to realise their gains" have been waiting for an event to trigger sales, he said.
Reporting by Winni Zhou and Andrew Galbraith; Editing by Sam Holmes & Shri Navaratnam