Volatility shook Chinese stock markets Tuesday, as the Shanghai index dropped more than three percent on concerns over slowing growth before erasing most of the losses, a day after authorities halted trading to arrest falling prices.
The Shanghai market slumped 6.86 percent on Monday after the release of weak manufacturing data heightened worries about the health of the world's second-largest economy, sparking a wave of selling of global equities.
A new "circuit breaker" mechanism aimed at curbing sharp swings went into effect on Monday, closing markets early, but analysts said its introduction added to traders' nervousness, prompting them to sell rather than risk being caught with holdings they could not liquidate.
"The main reason for yesterday’s fall was concern that China's economy won't steadily pick up. The circuit breaker was more of an accelerant for the fall," Northeast Securities analyst Shen Zhengyang told AFP.
"Today’s (Tuesday's) low should be the lowest point for the short term."
The benchmark Shanghai Composite Index ended down only 0.26 percent at 3,287.71, after tumbling as much as 3.24 percent during the day.
State-controlled funds bought stocks on Tuesday, Bloomberg News reported, quoting people familiar with the matter, mirroring moves last year when the government waded into the market to halt a rout.
The People's Bank of China, the central bank, also pumped 130 billion yuan ($20 billion) into the money market, according to a statement.
"Liquidity is tight in the market and the PBoC has to react to that," Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale, told Bloomberg.
- Share sale ban -
The Shanghai index soared 150 percent in the 12 months to mid-June and then plummeted nearly 30 percent in three weeks, prompting a government rescue package, before ending the year up 9.4 percent.
On Tuesday, the Shenzhen Composite Index, which tracks stocks on China's second exchange, dropped 1.86 percent to 2,079.77, after plunging 5.37 percent earlier.
In Hong Kong, the benchmark Hang Seng Index slipped 0.65 percent to close at 21,188.72, having lost 2.68 percent on Monday.
The mainland's market watchdog, the China Securities Regulatory Commission (CSRC), sought to calm the panic by defending the circuit breaker by saying it played a role in stabilising the market.
Under the system, a five percent drop in the CSI300 index, which covers both bourses, triggers an automatic 15-minute trading halt. A fall of seven percent closes the exchanges for the rest of the day.
The CSRC also addressed Friday's looming expiry of a ban on share sales by owners of more than five percent of a company -- introduced in July to help defend prices against the market rout.
The watchdog announced it was formulating regulations on major shareholders' selling, but said the rules will be announced "soon", leaving open whether the ban will be lifted in line with the original deadline.
Bloomberg reported that the CSRC had asked the exchanges to tell companies that the ban will remain in force beyond Friday. The regulator did not confirm the report.
Investors are still worried about the state of China's economy, a major engine of global growth.
China logged its worst economic performance since the global financial crisis in the third quarter, with gross domestic product (GDP) rising just 6.9 percent -- its lowest level in six years.
The government is due to release gross domestic product data for the fourth quarter and all of 2015 on January 19. China's GDP grew 7.3 percent in 2014, the slowest pace in almost a quarter of a century.