China stocks extended their recovery on Monday morning, raising hopes that measures taken by Beijing to prevent a full-blown market crash have worked, although renewed interest in leveraged bets has led to fresh regulatory crackdown on margin lending.
The Shanghai Composite Index gained 2.3 percent by midday, having bounced 18 percent from a four-month low hit last Thursday.
The index is still down 23 percent from its June 15 peak.
At 3,966.13 points, the Shanghai index is mid-way between the bottom and a perceived ceiling of 4,500 points, a level under which a government-backed bailout fund, formed by 21 brokerages, promised not to sell.
The CSI300 index rose 2.2 percent, to 4,198.36 points.
"This is victory in the first battles of a long-lasting war," said Hou Yingmin, analyst at brokerage Aj Securities.
"But it takes time for market sentiment to fully recover from the recent trauma, which was so severe, and bears are likely to make a comeback anytime soon."
Hou expects to see range-bound trading in the market over the next five to eight weeks.
Shenzhen's ChiNext shares, which were the target of intensified selling during the market meltdown, rebounded sharply for a third consecutive session.
They took their cue from an 8 percent surge in the CSI500 index futures, which tracks the CSI500 index of small- and mid-cap companies.
The CSI300 banking index, however, fell 2.2 percent, a sign that buying interest in blue chips has waned.
Signs that speculative investors have returned worried regulators. On Sunday, China's securities regulator warned brokerages not to open their trading systems to firms engaged in illegal businesses, and cracked down on identity fraud, a typical practice in grey-market margin financing.
The China Securities Regulatory Commission said that there were signs that illegal margin lending activities were re-emerging after the market's recovery, "potentially endangering the stable operation of the stock market again."
Hong Kong stocks also rose. The Hang Seng index added 0.2 percent, to 24,956.32 points, while the Hong Kong China Enterprises Index gained 0.8 percent, to 11,958.68.
Alfred Chan, chief dealer at Hong Kong-based Cheer Pearl Investment said light buying interest offset earlier profit-taking and pushed the market up a little, with cautious investors awaiting fresh market developments.
"Investors have calmed down quite a lot as the market has stabilized and people have started to build up their long positions little by little as trading activity normalized," Chan said.
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