* SSEC +0.12 pct, CSI300 +0.61 pct
* Steep morning drop erased by mid-morning
* Follows market slump on Thursday
* Investors worried by margin trade changes, monetary policy
By Pete Sweeney and Samuel Shen
SHANGHAI, May 29 (Reuters) - Chinese stocks ended the morning session up slightly on Friday, but the market saw high volatility after a sharp sell-off on Thursday that some analysts saw as the beginning of a correction.
After a grim start in which the Shanghai Composite Index briefly dipped more than 4 percent, key indexes recovered to bounce in and out of positive territory for most of the morning.
The CSI300 index rose 0.6 percent to 4,863.39 at the end of the morning session, while the Shanghai Composite Index gained 0.1 percent to 4,626.00.
The sell-off on Thursday, which saw turnover in Shanghai set a new record at 1.2 trillion yuan ($193.51 billion), was set off by a number of factors, including margin finance tightening moves by brokerages, a central bank move to drain market liquidity and an upcoming flood of initial public offerings (IPOs).
Next Tuesday and Wednesday, 23 companies will start taking IPO subscriptions from investors, which analysts estimate will lock up about 5 trillion yuan of liquidity.
All of these factors are seen as negative for liquidity, and as the rally was largely set off by monetary easing, investors are highly sensitive to any sign that cash washing into the market is starting to flow back out.
“There’s no need to doubt regulators’ determination to crack down on behaviours such as illegal margin financing and price manipulation,” Luo Yi, chief analyst at Huatai Securities, said in a note to clients on Friday.
“But at this point, should you panic and sell all your shares? I don’t think so,” he said, advising investors to look more closely at fundamentals and ditch unreasonably expensive shares.
Investor confidence was dented further as state-owned Chinese investment company Central Huijin Investment confirmed late on Thursday it had recently reduced holdings in listed Chinese financial institutions and Exchange Traded Funds (ETF).
However, many analysts believed investors were overreacting.
“We stick to our view that monetary easing will not stop unless the economy is revived, while the bull market will not cease, as long as Beijing pushes ahead reforms,” Ren Zeping, an analyst at Guotai Junan Securities Co, wrote on Friday.
“But it’s getting very windy for stocks at such a height.”
David Dai, Shanghai-based investment director at Nanhai Fund Management Co Ltd, said the market would be volatile for a while. “The correction is not yet over,” said Dai.
China CSI300 stock index futures for June fell 0.4 percent, to 4,958.2.
The Hang Seng index added 0.3 percent to 27,537.70.
The Hong Kong China Enterprises Index lost 0.3 percent to 14,144.84.
The volume of A shares traded in Shanghai by midday was 35.65 billion while Shenzhen volume was 24.06 billion shares.
Total trading volume of companies included in the HSI index was 0.9 billion. ($1 = 6.2013 Chinese yuan) (Editing by Alan Raybould)