SHANGHAI, May 6 (Reuters) - China stocks surrendered early gains and ended lower on Wednesday as fears of a deeper correction outweighed a chorus of upbeat official media commentaries which declared the bull market was not over.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen ended the session down 1.0 percent at 4,553.33 points, after rising more than 2 percent at one point in morning trade.
The Shanghai Composite Index retreated 1.6 percent, ending at 4,229.27, also erasing sharp early gains.
A liquidity-driven rally fueled heavily by borrowed money has seen China’s major indexes almost double in the past year, despite deteriorating company earnings and slowing economic growth. That has triggered expectations of a sharp correction.
On Tuesday, China stocks suffered their biggest one-day loss in nearly four months, hit by a combination of factors including tougher margin trading rules, a fresh wave of listings and speculation of a hike in stamp duty on stock trading.
“The market will enter a correction phase, and it will be very volatile,” Hao Hong, managing director of BOCOM International wrote in a research note on Wednesday.
“Expensive valuations, euphoric sentiment and slowing liquidity from margin lending expansion will challenge the market in the near term,” he said.
But some analysts said the bull market was merely changing gear, not direction.
“The government wants a slow bull market that can last for one or two years,” said David Dai, Shanghai-based investor director at Nanhai Fund Management Co.
“But if the market rises too fast, the bull market will end in several months.”
Investors like Dai took cues from bullish commentaries published on Wednesday by the official Xinhua News Agency, which were apparently aimed at calming markets after Tuesday’s tumble.
“Both regulators and stock investors hope to see steady and healthy development of the market,” said a Xinhua analysis.
“In the medium term, there’s adequate upward momentum, so market bullishness will continue,” the report said, citing loose monetary policy and the trend of people moving money into equities.
Uncertainty over the government’s stance has increased volatility, according to BOCOM’s Hong.
Public propaganda’s “frequent switches between bullish when the market crashes and cautious when the market surges will quickly erode its credibility and indeed make the re-pricing of market expectations more volatile than necessary,” he wrote.
“Regulators must remember their primary role is to regulate and monitor market risks - it is not to be a strategist.”
Transportation and energy stocks dropped sharply on profit-taking, but Shenzhen’s start-up board ChiNext rose 1.7 percent, bucking the broader trend.
Most insurance companies managed to post a gain today.
“Valuations in this sector remain reasonable, particularly when compared to other, more speculative sectors,” said Gerry Alfonso, director at Shenwan Hongyuan securities co.
Despite the market’s recent climb, the benchmark indexes remain well off the highs of the last rally which ended in late 2007. As the global financial crisis swept into China, share prices slumped some 70 percent over the following year.
Reporting by the Shanghai Newsroom; Editing by Kim Coghill