Volatility returned to the Chinese stock market on Wednesday as the key Shanghai index fluctuated more than 6 percent, underlining persistent worries about economic pressures despite continued government measures.
The benchmark Shanghai Composite Index closed 1.23 percent higher to finish at 3,794.11 points, reversing losses of more than 5 percent in the morning trading session, on speculation of fresh government support, including an expected reserve requirement ratio cut.
The rollercoaster ride followed Tuesday's slump, when the Shanghai Index dived 6.1 percent to end at 3,749.12 points, the biggest daily decline in three weeks, breaking a three-day winning streak.
The wild swing came as the government took support measures to arrest the massive sell-off in the country's stock market, with the Shanghai index rising more than 150 percent in 12 months, then losing more than 30 percent in less than a month from its June peak.
Government support measures have included barring major investors from selling their stakes, pouring in funds and cracking down on short selling.
Though the market has shown signs of stabilization on the back of government support measures, concerns that authorities could pull rescue funds have shaken investor confidence and dragged down the index, said Xun Yugen, a senior analyst with Haitong Securities.
China Securities Regulatory Commission (CSRC), the country's securities watchdog, said last Friday that the government will allow market forces to play a bigger role in determining stock prices.
State-owned margin lender China Securities Finance Corporation, Ltd. (CSF) also announced last Friday that it has transferred shares to Central Huijin Investment Co., Ltd., an investment arm of the government, raising speculation that the CSF is pulling funds from the market. The CSF clarified that it will hold its shares and stabilize the market during dramatic fluctuations.
The CSF's liquidity injection has been crucial to halt the rout and stabilize the market.
Speculation that the government may begin to scale back its massive support for the stock market also prompted investors to sell after a run-up in prices over the last few weeks, Xun said.
Stocks came under additional pressure as the yuan weakened against the dollar last week, which investors feared could lead to fresh outflows of capital from the country.
The People's Bank of China adjusted the exchange rate formation system to better reflect market development last Tuesday by closing the gap between a lower central parity rate and higher market expectations.
The market reacted with surprise as the falling yuan led to a heavy sell-off in regional currencies, declines in Asian stocks and downward bulk commodity prices.
The stock market swing was also triggered by newly released economic indicators that fell short of market expectations, revealing that the Chinese economy still lacks momentum and downward pressure remains.
China's value-added industrial output, which measures the final value of industrial production, expanded 6 percent year on year in July, down from 6.8 percent for June, the National Bureau of Statistics (NBS) said last Wednesday.
The decline in output growth ended a steady recovery trend recorded in the second quarter of this year.
Meanwhile, China's fixed-asset investment, a major driver of growth, also witnessed slightly slower growth in July, with no sign of improvement for investment in property and infrastructure, NBS data showed.
Latest customs data revealed that China's exports fell 0.9 percent year on year in the first seven months of the year, with exports in July alone slumping 8.9 percent, compared with a 2.1-percent increase in June. In July 2014, exports had increased by 14.5 percent year on year.
China's rail freight volume, an indicator of economic activity, also plunged 10.9 percent year on year to about 278.89 million tonnes in July, pointing to plunging demand for major commodities, including coal and metals.
Wang Yiming, deputy director of the Development Research Center of the State Council, advised policymakers to perfect macro regulation by improving fiscal and monetary policies and to be on the lookout for risks to prevent economic volatility.
A research note from Minsheng Securities also said China's growth still faces huge pressure and the country needs to make more efforts to achieve its annual economic growth goal of around 7 percent.
China should take more pragmatic measures to stabilize growth, including further cuts in the reserve requirement ratio (RRR) and more targeted measures to reduce long-term interest rates, Minsheng said.
Since November, China has reduced benchmark interest rates four times and lowered the RRR three times to stimulate the economy.
