Mainland stocks continued their downward spiral yesterday with the Shanghai index posting its biggest weekly drop in nearly six months, prompting the securities regulator to voice support for the sliding market. Investors are now betting on the future direction with analysts divided over the outlook. The Shanghai Composite Index dived 93.588 points or 2.98 per cent yesterday to 3,046.972. For the week, it slumped 6.55 per cent, the biggest weekly drop since February 27. With the index fast approaching the symbolic 3,000-point level, China Securities Regulatory Commission chairman Shang Fulin yesterday insisted that the high valuation of mainland stocks was supported by a solid economic recovery. 'Positive changes have taken place on the market,' said Mr Shang, addressing a government conference in Beijing, according to Xinhua. 'The market movement reflected the heightened expectations of an economic recovery.' As of yesterday, the benchmark indicator was still 67.3 per cent higher than last year's close despite a 12.2 per cent slide since this year's high of 3,471.44 points on August 4. Panic-stricken investors chose to take profit as they rushed to dump shares during the past week, fearing that monetary tightening is imminent as Beijing fine-tunes policies. Jing Ulrich, JP Morgan's chairman for China equities, said the panic selling was overdone since senior officials have pledged that they will stick to the current proactive fiscal policy and moderately loose monetary policy. 'Much of the recent selling has been fuelled by excessive concern about imminent tightening,' Mrs Ulrich said. 'As a result of rising demand in various downstream sectors - from cars and appliances to steel - corporate profits should show a gradual improvement.' A consensus opinion among analysts is that the A-share market had re-entered bubble territory after it scaled a record high of 6,092.06 points in October 2007 when excessive liquidity sent stock prices soaring. All eyes are on turnover now as market players believe an exit of speculative capital will foreshadow a boom-to-bust cycle. Yesterday, Shanghai-listed stocks traded an average 26.24 times last year's earnings. 'Liquidity hinges on people's expectations,' said Zhou Liang, the head of China investment and advisory at Thomson Reuters. 'However, people's expectations are unpredictable since the economic outlook is not clear.' Beijing's four trillion yuan (HK$4.54 trillion) stimulus package unveiled late last year has had an impact on the economy with the mainland's gross domestic product growing 7.1 per cent in the first half of this year. Investors were pinning their hopes on a constant inflow of capital to buoy stocks. Bank loans last month were valued at 356 billion yuan, only 25 per cent of the amount in June, a sign that bank credit could dry up soon. Wei Jianing, a researcher with the State Council's Research Development Centre, said earlier that nearly 1.2 trillion yuan of bank loans were illegally invested in stocks. 'The trend for an economic turnaround is turning more obvious, based on the July data, but the recovery is not on a solid footing yet,' said a research note by China International Fund Management. 'Consequently, a further drop is expected, but it will not be severe. Fluctuations will continue to dominate the market.'