Analysts gloomy despite stocks' 1.8% rally

Stock analysts remained gloomy about Chinese equities despite a substantial rally on Thursday that extended gains for a second day.

The Shanghai Composite Index advanced 1.8 percent - 35.27 points - to 2,029.07, as an index showed Chinese manufacturing activities continued to expand in July.

Lianyungang Huanghai Machinery Co Ltd, a heavy machinery maker, jumped by the daily trading limit of 10 percent to 19.21 yuan. China Vanke Co Ltd, the country's biggest residential developer by market share, grew 2.31 percent to 9.74 yuan. China Petroleum & Chemical Corp, also known as Sinopec, gained 1.14 percent to 4.43 yuan.

Every sector rose, led by a 6 percent increase by software services companies. The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong increased 0.7 percent.

"China's undergoing transition right now and that presents a lot of risks. Investors put premiums on risk," said Yang Shaohua, an A-share strategist with Shenyin & Wanguo Securities Co Ltd, who added the A-share market has yet to hit the bottom.

Up to 70 percent of the risk premium is priced in on the main board. Smaller cap companies on the Growth Enterprise Board, which has seen a rally this year, have bigger downside risks, said Yang. He expects a correction in the GEB market in the third quarter.

Chen Li, a UBS AG stock strategist, also said last week that he is cautious about the A-share market in the second half of the year.

The Shanghai Composite Index has dropped around 13 percent this year against the background of a slowdown in the world's second-largest economy.

Hong Kong's benchmark Hang Seng Index added 0.9 percent on Thursday. The city's benchmark index has fallen 2.5 percent this year, the worst performance among developed markets tracked by Bloomberg.