Updates closing prices

HONG KONG, July 28 (Reuters) - China stocks extended their five-week rally on Monday, with the rare earth sector climbing to a three-year high ahead of crucial trade talks with the United States, while insurers gained following an industry policy change that boosted sentiment.

** The Shanghai Composite index .SSEC reversed earlier losses to close up 0.1% at 3,597.94, hovering near the highest level in 3-1/2 years. The blue-chip CSI300 index .CSI300 added 0.2%.

** The rare earth sector .CSI930598 climbed 1.5% to a fresh three-year high, lifting onshore markets higher, as top U.S. and Chinese economic officials prepare to resume talks in Stockholm later in the day.

** The discussions will likely extend their trade truce by three months, preventing the implementation of higher tariffs, according to analysts.

** The insurance sector .CSI399809 added nearly 3% to rank among the best performers onshore, after the industry body cut the reference rate for life insurance products.

** "Investor concerns on U.S.-China trade frictions appear to have eased," Kinger Lau, chief China equity strategist at Goldman Sachs, said in a note. "A potential U.S.-China trade deal could be a market-clearing event for Chinese stocks."

** The bank raised its 12-month MSCI China index target to 90 from 85, representing an 11% potential rise, due to improved U.S.-China relations, reduced regulatory risks, stronger yuan and supportive liquidity conditions.

** Weighing on the markets on Monday, commodity-related companies pared last week's rally which was spurred by Beijing's campaign to tackle overcapacity. Indexes tracking steel .CSI930606 and coal .CSI000820 sectors lost 1.4% and 2.9%, respectively.

** Hong Kong's benchmark Hang Seng Index .HSI rose 0.7% to 25,562.13 and continued to hover near the highest since November 2021.

** Insurers AIA 1299.HK, Ping An 2318.HK and China Life 2628.HK gained between 2% and 4.9%.

** However, the tech index .HSTECH lost 0.2%.

(Reporting by Jiaxing Li in Hong Kong; Editing by Sumana Nandy and Mrigank Dhaniwala)

((jiaxing.li@thomsonreuters.com))