A smartphone shows stock index, April 7, 2015. [Asianewsphoto bY Long Wei]

Chinese stocks rallied on Tuesday, with the benchmark Shanghai index up 2.5 percent to a seven-year high, after the central bank injected 20 billion yuan ($3.28 billion) into the money market.

The Shanghai Composite Index surged by 97.45 points to close at 3,961.38, marking its highest level since March 2008, while the Shenzhen Component Index advanced 2 percent to 13,768.73 points.

Finance, environmental protection and transport sectors led the gain. Orient Securities jumped by the daily limit of 10 percent, while Industrial Bank and Ping An Bank added more than 6 percent. Southern Airlines and China Eastern Airlines each rallied by 10 percent.

Water processors, including Nanjing CEC Environmental Protection, Xingyuan Environment and Tianjin MOTIMO Membrane Technology, surged by the daily limit.

The People's Bank of China pumped 20 billion yuan into the market through a seven-day reverse repurchase agreement, according to a statement on its website.

The benchmark overnight Shanghai Interbank Offered Rate (Shibor), which measures the cost of interbank lending, shrank 12.1 basis points to 2.766 percent.

The move came after the central bank lowered the minimum down payment for second homes from 60 to 40 percent on Mar 30.

"The profitability of the stock market has attracted more capital inflow, thus forming positive circulation", said Xun Yugen, chief strategist at Haitong Securities, in a note, adding that policy direction is good.

Latest PMI data showed signs of a slight recovery and as the pork price picks up, deflation risks decrease, according to the note.

Chinese manufacturing purchasing managers' index (PMI), a key indicator of factory activity, posted 50.1 in March, up from 49.9 in February, according to the National Bureau of Statistics.

Jiang Chao, analyst at Haitong Securities, added that uncertainty remains as to the sustainability of the recent inflation.

The CSI 300 Index rose nearly 2.2 percent to 4260.04.