Update: Mainland Stocks Stop Sliding

* Shanghai Composite Index finishes day up 0.27% after falling as much as 1.22% in morning

* Investors pour money into oversold small caps, with startup board ChiNext rising 1.08%

(Beijing) — Chinese mainland stocks bounced back from early losses on Wednesday in a volatile session as investor caution subsided following the previous day’s sell-off.

The Shanghai Composite Index closed 0.27% higher at 2,915.73 after falling as much as 1.22% in the morning, though the benchmark index failed to retake the 3,000 mark breached during Tuesday’s rout.

The benchmark index plunged 3.8% on Tuesday as escalating Sino-U.S. trade tensions rattled investors, sparking a large enough drop to trigger margin calls, further exacerbating the sell-off.

On Wednesday, liquor-makers and defense stocks helped the market bounce back from morning losses. Heavily weighted spirits-maker Kweichow Moutai Co. Ltd. jumped 3.47% on the day, while state-backed electronics-maker China Avionics Systems Co. Ltd. surged by the 10% daily limit.

Investors also poured funds into small caps that were oversold on Tuesday, with startup board ChiNext managing a 1.08% increase. The Shenzhen Component Index gained 0.92% for the day.

Wednesday’s rebound followed a call by People’s Bank of China Governor Yi Gang late Tuesday for investors to stay “calm and rational,” an unusual step for a central banker to take to calm a rattled market.

Yi said that the central bank is prepared with policy tools to maintain liquidity at an appropriate level. In response to the tariff threats between China and the U.S., Yi said that the central bank has set up a team to track financial risks to help stabilize market expectations.

Late on Tuesday, about 30 listed companies announced stock buyback plans by major shareholders in an aim to improve investor sentiment. Four major state-owned securities newspapers, usually seen as bellwethers for financial policies and regulations, ran prominent editorials and stories quoting analysts who said there was no reason for the sell-off to continue.

Nevertheless, analysts warned that the rebound could be short-lived, as some argued that the outlook for domestic stocks is clouded by lingering uncertainties about tightening liquidity and the ups and downs of the U.S.-China trade negotiations.

“U.S.-China trade frictions remain broadly negative for the market and for investor sentiment, and are likely to weigh on forward earnings given the ongoing uncertainties coupled with a high base effect when compared with last year’s performance,” said Raymond Ma, portfolio manager at Fidelity International, on Wednesday.

Ma Wenyu, a strategist with Shanxi Securities Co. Ltd., said, “Investors should continue to be cautious in the short term and defend against downside risks.”

Ma pointed out that more than 10 listed companies have plummeted to levels that could trigger the forced sale of the stock pledged as collateral, or margin calls, which could trigger further sell-offs and declines in stock prices.

Contact reporter Leng Cheng (chengleng@caixin.com)

Read more about trade tensions between China and the U.S.