Chinese shares kept recovering on Monday, with the benchmark Shanghai Composite Index up 0.88 percent to close at 3,992.11 points in the day.

The smaller Shenzhen Component Index gained 1.52 percent to close at 13,202.40 points.

The Shanghai index at one point rallied above the 4,000-point psychological mark in the morning session, before retreating to losing territory at midday.

The fluctuation was mainly caused by a report, which was swiftly refuted by the China Securities Regulatory Commission (CSRC), that it was considering pulling stabilization funding used to stem heavy sell-offs after the sharp market decline.

"Stabilizing the market, maintaining investors' confidence and preventing systemic risk are still the goals for the CSRC," spokesperson Zhang Xiaojun said in a statement on Monday, adding that the commission will do its utmost to fulfill these tasks.

The major index maintained a volatile gaining trend in the afternoon session, with the gains narrowing mildly near the closing bell.

Chinese shares began to pick up on Thursday, after a freefall since their peak in mid-June caused a loss of more than 35 percent to their value, as margin traders unwound positions and some investors cashed out.

Share values recovered after the government stepped in with measures including pouring in funds and restricting futures trading on a major small-cap index. The central bank also took steps to ensure abundant capital flow into the market.

"China's economy is showing positive signs of stabilization and recovery," said Li Xunlei, chief economist with Haitong Securities, citing the better-than-expected economic data for the second quarter having reassured investors, as well as the foundation for sound development of the equity market.

China's second-quarter GDP expanded 7 percent year on year, thanks to the government's bold moves in macro-control and structural reforms, according to the National Bureau of Statistics.

Analysts have forecast that the stock market will progress more robustly as risks have been minimized after the CSRC announced on Sunday that it will crack down on illicit securities trading to ensure a steady recovery of the market.

During Monday's trading, winners outnumbered losers by 679 to 247 in Shanghai, and by 959 to 312 in Shenzhen. Total turnover on the two bourses reached around 2.008 trillion yuan (328.15 billion U.S. dollars).

Shares related to aviation manufacturing, military and oil industries led the gains. AVIC Aero-Engine Controls Co. surged by the daily limit of 10 percent to end at 29.32 yuan per share.

Securities, railway construction and wine making were among the biggest losers. Citic Securities Company Limited shed 3.27 percent to close at 24.55 yuan.

The ChiNext Index, tracking China's Nasdaq-style board of growth enterprises, rose 2.33 percent to end at 2,848.30 points.