SHANGHAI, April 20 (Reuters) - China stocks surrendered early gains and dived on Monday in volatile trade as fears of a regulatory crackdown offset the central bank's boldest policy move yet to bolster the slowing economy.
Securities regulators announced on Friday they would allow fund managers to lend shares for short-selling, and ban margin financing through unregulated accounts.
Traders feared the moves would prompt a selloff on Monday morning, sparking a bout of profit-taking or even a deeper market correction after a stunning six-month rally.
But late on Sunday the central bank ramped up its efforts to shore up the economy, cutting banks' reserve requirements by the biggest amount since the depths of the global financial crisis.
Some of the estimated one trillion yuan in funds freed up by the move are expected to find their way into stock markets.
Although the government is supportive of a bull market, "the market will now start to price in an interest rate cut, and positive news flow appears to have exhausted for now," wrote Hong Hao, chief strategist with BOCOM International.
"A market consolidation is nigh, and it will be extremely volatile. A potential 10 percent swing from high to low will shake out many weak hands."
His view was echoed by Wang Yu, analyst at Pacific Securities.
"The government wants a slow bull, not a crazy bull," he said.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 1.6 percent, to 4,521.92, while the Shanghai Composite Index lost 1.6 percent, to 4,217.08 points.
Infrastructure stocks jumped but financial shares fell.
Among the most active stocks in Shanghai were Bank Of China , down 3.9 percent to 4.74 yuan; Agricultural Bank of China, down 2.0 percent to 3.95 yuan and China State Construction, up 9.3 percent to 9.87 yuan.
In Shenzhen, BOE Technology, up 3.6 percent to 4.63 yuan; TCL CORP, up 0.5 percent to 6.18 yuan and CS Zoomlion, up 1.5 percent to 8.11 yuan were among the most actively traded.
Total volume of A shares traded in Shanghai was 85.3 billion shares, while Shenzhen volume was 36.8 billion shares. (Reporting by the Samuel Shen and Pete Sweeney; Editing by Kim Coghill)