Bears tighten their grip on stock markets

Fear seems to be returning to the Chinese equity market after another sharp fall in stock indexes on Wednesday, dimming investors' hope for a sustained recovery from the recent market rout.

Analysts warned that it may be a long time before the market rebounds to the previous high, as the illegal leveraged funds have been wiped out and investors with cash are adopting a wait-and-see approach.

The benchmark Shanghai Composite Index on Wednesday sank by 3.03 percent to close at 3,805.7 points, despite the surge in blue-chip energy and financial stocks. The startup index ChiNext in Shenzhen suffered an even heavier loss of 4.99 percent.

Nearly 1,000 stocks in the Shanghai and Shenzhen bourses tumbled by the 10 percent fluctuation limit, indicating shaky investor sentiment despite the government rolling out a series of measures to prop up the falling market.

"The government can use policy measures to urge State-owned funds and companies to buy shares. But a lot of cash is still lying in the bank accounts of investors who appear to be hesitant at this moment," said Lu Ting, chief economist at Huatai Securities Co Ltd.

The stock market has been on a roller-coaster ride with the benchmark index witnessing a nearly 30 percent plunge that erased about $4 trillion of market value after a year-long rally of 150 percent which peaked in mid-June.

Late on Wednesday, the China Securities Regulatory Commission said it is closely working with the police and major Internet portals to crack down on online rumor-mongering and spreading of false information, that could affect the stock market.

The market had not been fueled so much by improved economic fundamentals and corporate profitability as by ample liquidity and investors' anticipation of economic reforms, said analysts.

But economists have warned that the recent contingency measures, including the halt in initial public offerings and curbs on share sales by major shareholders, may run the risk of eroding investors' confidence in the government efforts to push capital market reform and opening up.

"The key is to restore market confidence and convince investors that the reforms will continue," Lu said, adding that the government should resume its role as a referee and give way to market functions once the systemic financial risks are contained.

On Wednesday, foreign investors continued to be net sellers of Chinese A shares through the Shanghai-Hong Kong Stock Connect program for an eighth consecutive day. Offshore investors have reduced total holdings by $7.1 billion through the trading link since July 6, the Financial Times reported.

There are rising concerns among overseas investors that the government intervention to stem the slide may affect the international accessibility of the A-share market and impede the opening-up process of China's capital market.