Chinese stocks recover for third day as regulators crack down on margin lending

Chinese stock markets, led by small caps, continued to recover for a third day today, raising hopes that measures taken by Beijing to avert a full-blown market crash had worked.

Regulators had launched a fresh crackdown on margin lending with signs re-emerging that speculators, who last Wednesday scrambled to unwind their leveraged positions (See: China's stock markets crash after $3.5-bn loss), were again borrowing to bet on the rebound.

The Shanghai Composite Index closed 2.4 per cent up at 3,970.39 after gaining 13.2 per cent over the past three sessions.

Having at one point rallied above the a key psychological level of 4,000 points, the Shanghai index now stood mid-way between last week's four-month low and a perceived ceiling of 4,500 points, a level under which a government-backed bailout fund, formed by 21 brokerages, had promised not to sell.

The CSI300 index was up 2.6 per cent, to 4,211.81 points.

"This is victory in the first battles of a long-lasting war," said Hou Yingmin, analyst at brokerage Aj Securities, Reuters reported.

"It takes time for market sentiment to fully recover from the recent trauma, which was so severe, and bears are likely to make a comeback anytime soon."

The Shenzhen Composite Index, which tracks stocks on China's second exchange, shot 4.18 per cent, or 84.99 points, to 2,120.25 on turnover of 391.8 billion yuan.

The recovery that began at the end of last week, ended a run of almost a month of heavy losses that saw Shanghai sink about 30 per cent, wiping trillions off valuations.

In an intervention last week, the Chinese government barred major shareholders from selling shares in listed companies, a move that saw trading suspended in almost half of mainland stocks.

Those measures were eased today as around 400 firms resumed trading again. According to analysts, some confidence was returning, boosted by news from Brussels that a bailout for Greece had been agreed (EU tightens screws as Greek govt bends backwards).

Hong Kong stocks, meanwhile rose for a third straight day, up 1.3 per cent to 25,224.01 points, the highest close since 6 July. The China Enterprises Index closed at 12,003.83 points gaining 1.2 per cent.