China stocks bounce back, but investors still jittery

After Wednesday's crash, Chinese stocks bounced back on Thursday, helped by regulatory and state intervention, The intervention restored some calm in markets after days of panic selling. But, it is still unclear whether the apparent recovery is a temporary reprieve or beginning of a longer term stabilisation.

Investors looked for clues as to which direction markets could swing amidst regulatory curbs on trading in stocks and a six-month ban on bulk sales of stocks of listed firms.

Following Wednesday's curbs that helped to curb panic selling and wild swings in stock markets, the CSI 300 index of the biggest listed companies in Shanghai and Shenzhen gained 6.4 per cent today, but investors remained nervous.

The Shanghai Composite, which fell nearly 4 per cent at the open of trading, rose 5.8 per cent at the close of trading today, the biggest daily percentage gain in six years. Shares in Shenzhen gained 3.8 per cent.

In Hong Kong, the Hang Seng index was up 3.9 per cent, after falling nearly 6 per cent the day before.

Markets in the region also turned positive, with the Nikkei 225 share average in Japan and the Kospi in South Korea both closing 0.6 per cent higher.

But, even as shares rose, there were warnings that mainland markets have further to fall. It also remains to be seen whether this is a temporary reprieve or the start of a stabilisation.

According to analysts, valuations of many small companies remain too high, and the government and state-owned companies are unlikely to buy up those shares, preferring instead to bid up the prices of more fairly priced larger companies.

Commodities also gained from the bounce back of Chinese stocks, with Brent crude up 66 cents at $57.72 (£37.52) a barrel - a 1.2 per cent rise - and New York crude rising 90 cents to $52.55 a barrel - a 1.7 per cent gain.

Meanwhile, police and other Chinese agencies are investigating potential ''malicious'' short-selling of Chinese shares, state news agency Xinhua said.

Stock valuations in mainland China have lost more than a quarter since reaching a peak on 12 June, in the biggest slide since the global financial crisis in 2008.

Some $4 trillion has been wiped off during the stock market rout in the past six weeks, and about half of all China-listed firms have stopped trading.

With some 80 per cent individual investors, many of whom dependent on brokers to play in the stock market, the current malaise is not a temporary blip as the investor-broker connections reflect longer-lasting repercussions in the market.

Also, Chinese markets, especially the Shanghai and Shenzhen exchanges, have seen a number of businesses getting listed over the past six months, and an explosion in margin trading.

With stock prices falling further, brokers are likely to ask for more cash or other collateral (margin calls). But, since regulators have cracked down on margin trading, investors will be forced to offload assets to come up with cash.