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China stocks plummeted and then rallied again in a highly volatile session on Tuesday, shrugging off regulatory attempts to pacify a tumbling market as rumours swirled about backdoor interventions from Beijing.
Chinese equity markets have fallen more 20 percent from their peak in mid-June, with the Shanghai Composite Index punching through a psychological support level on Monday at 4,000 points, which Bank of America Merrill Lynch analysts warned was a "risk zone" that could trigger more conservative margin traders to eject from their positions.
The CSI300 index rose two per cent on Tuesday to 4,275.09 points at the end of the morning session, while the Shanghai Composite was unchanged at 4,052.47 points.
China CSI300 stock index futures for July rose seven per cent, to 4,340, which was 64.91 points above the current value of the underlying index.
Tuesday's see-saw trading followed a brutal Monday session in which primary indexes swung wildly, with the SSEC swinging 10 percentage points between its highest and lowest points - its most volatile day in 10 years - to end down more than three per cent.
A rally that saw primary mainland indexes gain around 150 per cent at the peak in June was set off by a surprise monetary easing move in November, and many believed that Chinese investors betting that further easing moves in the pipeline would boost stocks.
But further easing of both interest rates and bank reserves at the weekend, which came shortly after an announced plan to eliminate the loan-to-deposit ratio requirement for banks, had no discernable impact on sentiment, implying that the People's Bank of China's monetary gunpowder has gotten wet.
Hong Hao, chief strategist with BOCOM International, said that since the weekend rate cut failed to stem the market slide, there's little to stop the indexes falling further in a vicious cycle that would prod more and more investors to answer margin calls.
"The weekend monetary easing was very strong stimulus. If that didn't stop the sell-off, then the market will wonder what else policymakers have in their sleeves," Hong said.
Rumours have swirled about backdoor efforts to prop up valuations. Chinese social media has reported that the China Securities Regulatory Commission would freeze IPOs to support liquidity; that the insurance regulator has ordered insurers not to sell off their equity positions; that China will adjust its stamp tax for stocks.
None of those rumours have been confirmed, and a debate is rising about whether and how Beijing will act, and whether the current drop is a buying opportunity or a long overdue rationalisation of a rally that went too far.
"The logic of the continued fall today is still driven by the excessive gains over the past year," said Zheng Weigang, head of investment at Shanghai Securities.
"Looking forwards, technical rebounds may soon occur but high valuations will likely limit the scope."
A major complicating factor is the effect leveraged trading is having on the market.
On paper, margin finance in China's market is high but not extreme, but analysts note that Chinese investors - including some corporate investors - have found ways to raise funds for speculation outside of margin channels.
Some online lenders have publicly started calling for investors to close out their margin positions.
For example, one Chongwing-based retail lender Zhuanledian - which advertises itself as lending 100,000 yuan for every 10,000 yuan of collateral - made a similar request.
"No matter if you make a profit or loss, please empty your stock holdings before market close on July 1. Otherwise, you will be forced to sell the stocks on the next trading day," the company said on its website.
