Central authorities have gained the upper hand in a six-month battle of wits between investors and Beijing to control the Shanghai and Shenzhen stock markets. Since December, central government leaders - led by economic chief Zhu Rongji - have been doing their utmost to tame the highly charged bulls and, finally, they seem to be succeeding. The decisive strike came last Thursday, when the People's Bank of China issued a seven-point directive ordering commercial banks and brokerages to stop illegal stock investments. The directive ordered banks to stop trading in treasury bond repurchase (repo) agreements immediately, and unwind stock positions within 10 days. It also banned brokerages from margin trading, and threatened removal and punishment for top managers found guilty of irregular stock practices. Analysts said the sharp drop in turnover and trading multiples, and the absence of hotly traded stocks suggested the speculative froth in the markets appeared to have diminished. Early this week, daily combined turnover of the two exchanges fell to 10-12 billion yuan (about HK$9.92-$11.91 billion), against 25.8 billion yuan last Friday, and more than 30 billion yuan early last month. On May 12, when bullish sentiment reached a climax, turnover was nearly 40 billion yuan - more than twice Hong Kong's level during the corresponding period. Based on Tuesday's prices, shares were trading at more than 40 times their historical earnings, against a high of nearly 60 times at the height of the recent buying frenzy. China Guotai analyst Zhang Jun said: 'The latest move was a thorough attempt to remove the speculative element in the markets - and it has worked.' Analysts said they did not expect a repeat of the spectacular rises in share prices in the short term, although prices would rise moderately in the medium term. Shanghai Finance Securities analyst Zheng Weigang said: 'From what we hear the central government thinks the risks in the markets remain high and it should be trading at multiples of 25-30.' The latest move capped a series of efforts by Beijing since December to rein in the exuberant markets, when it issued the most severe warning in a People's Daily commentary to warn against excessive speculation. The efforts were unusual in that not since the stock exchanges reopened in December 1990 had there been such a sustained and systematic bid to stem market irregularities. The market-dampening measures were multi-faceted: besides increasing sharply the supply of shares, they also tried to slow demand by choking off the key source of share funding - the repo market, where T-bond holders use the debt securities as collateral to raise funds supplied largely by commercial banks. From Friday, banks are banned from lending money in the repo market. A China Everbright Securities broker said: 'The measures effectively cut off the misappropriation of funds from enterprises, banks and brokerages into the stock markets - something Beijing has not directly touched on previously.' Brokerages and their top managers who have broken trading rules also are being disciplined in the clean-up. The measures dealt a heavy blow to investors, who believed the central securities authorities would not do anything drastic to dampen the mainland markets in the run-up to Hong Kong's handover and the 15th Communist Party congress in autumn. Indeed, it was not Beijing's intention to kill the bull run, only to slow the charge to forestall any share price collapse should foreign funds desert the markets after the handover. Shenyin & Wanguo analyst He Yong said: 'Beijing is genuinely concerned that it will be left carrying the baby should foreign funds abandon the markets after July 1.' Although foreign investors are banned from A shares - which are reserved, in theory, for domestic investors - many Hong Kong and Taiwanese funds reportedly have found their way into these stocks. ING Baring Securities head of China research Hoong Yik-luen said: 'Beijing cannot afford to have the stock markets collapse or get out of hand in the run-up to the handover. 'Lots of people are bullish about the mainland's sustainable economic growth, and there is lots of liquidity here for the markets. But the problem is Beijing is very wary of the liquidity that has driven up share prices. From time to time, I expect Beijing will let prices drop.' Until early May, China's stock markets apparently had defied the series of market-dampening measures, with the Shenzhen A-Share Index climbing 84 per cent so far this year, and the Shanghai A-Share Index 74 per cent. Nothing illustrated the new-found resilience of the markets more clearly than the 5.3 per cent rebound of the Shenzhen A-share Index on June 2, the first trading day marking the one-month countdown to the handover. The rebound, however, was halted with the issue of the PBOC directive, which also barred state enterprises from buying shares unless they were long-term investments. Despite the clean-up, investors could still make profits in the markets, so long as their money came from legal sources. Analysts said improving economic prospects, projected higher returns of listed companies, and the listing of good-quality companies combined to make stock investment attractive in the medium to long term. Besides, the markets are still awash with liquidity. Personal savings are forecast to reach 4.7 trillion yuan this year, against 3.85 trillion yuan last year, or 57 per cent of the country's gross domestic product. Given the high returns the stock market offers to investors, and the two cuts in interest rates last year, banks no longer offer attractive yields to depositors. In other words, there is still too much money chasing too few shares amid a lack of attractive investment avenues. For now, however, the bulls are taking a respite. Brokers expect the Shanghai and Shenzhen markets to calm down as Beijing makes investigations a regular event. Analysts said there would be more measures for the market, including an imminent reshuffle at the top of the watchdog China Securities Regulatory Commission, explanatory clauses to the ban on state-run and listed companies from trading stocks, and an official announcement of the punishment for brokerages violating trading rules. They said the measures would do the seven-year-old industry a great deal of good in the long run.