The mainland stock market crashed through a psychologically important level yesterday before a rumour about an incentive policy helped it recover early losses to finish higher.
However, the volatile trading deepened worries about a potential sharper market decline, fuelled by weaker corporate earnings.
The Shanghai Composite Index fell 0.7 per cent to hit an intraday low of 1,995.17 points in the early afternoon, breaking through the significant 2,000-point level. However, the index ended at 2,030.32, up 1.07 per cent on the day, marking the biggest daily gain since November 1.
Millions of individual investors regarded the 2,000-point level as a boom-to-bust threshold, and crashing below that level was thought to have sparked a bout of panic selling.
But as talk spread in the afternoon about an imminent cut by the central bank in banks' reserve requirement ratio, investors rushed back into the market to snap up shares in the belief the government was poised to put a floor under the symbolic 2,000-point level.
A reduction in the reserve ratio would free up cash that could be invested in the market, underpinning share prices.
In Hong Kong, the blue-chip Hang Seng Index rose 1.39 per cent, the best single day performance since September 14, boosted by the intraday reversal on the mainland market.
"It was the talk of the incentive that led to the rebound in the afternoon," said Shenyin Wanguo Securities analyst Wei Daoke.
But he warned that "the rebound would become short-lived if no concrete boosting measure is published".
Mainland internet portal Sina, citing unidentified sources from the central bank, reported that Beijing had no plans to cut the banks' reserve ratio.
Mainland stocks have been mired in a bearish mode since 2010, and the main gauge has lost 7.7 per cent this year.
The Hang Seng Index is up 16.8 per cent.
Investors were betting on a further decline in the market because the slowing economy would dent corporate profit performances this year.
Pessimistic analysts predict the Shanghai index will drop a further 10 per cent to as low as the 1,800-point level.
The China Securities Regulatory Commission has suspended approvals of new share offerings in the past six weeks to avoid more equity coming on to the market.
The state-owned China Securities Journal reported yesterday that the regulators would soon increase the investment ceiling for individual qualified foreign institutional investors from the current US$1 billion, a move aimed at encouraging overseas capital into the country's stock market.