CHINA’S stocks, led by small caps, extended their recovery for a third day yesterday, raising hopes that measures taken by the government to prevent a full-blown market crash have worked.

    The Shanghai Composite Index closed 2.39 percent up at 3,970.39. It has gained 13.2 percent during the past three sessions. The CSI300 index rose 2.56 percent to 4,211.81 points. The index for Shenzhen-listed ChiNext shares, which were the target of intensified selling during the market meltdown, rebounded sharply for a third consecutive session, up 4.9 percent. But the CSI300 banking index, however, fell 3.1 percent, a sign that buying interest in blue chips has waned.

    “Bargain hunters are focusing on small caps that were hit the most during the market rout,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai. “The market doesn’t have too much interest in big companies. They were the outperformers in the market plunge.”

    Having briefly rallied above the key psychological level of 4,000 points, the Shanghai index is now mid-way between last week’s four-month low and a perceived ceiling of 4,500, a level under which a government-backed bailout fund, formed by 21 brokerages, has promised not to sell.

    Despite the gains, investors are cautious after four weeks of volatility.

    “This is victory in the first battles of a long-lasting war,” said Hou Yingmin, analyst at brokerage Aj Securities. “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.”

    Regulators have launched a fresh crackdown on margin lending as signs have re-emerged that speculators, who only a few days ago scrambled to unwind their leveraged positions, are again borrowing money to bet on the rebound.

    Margin traders increased holdings of shares purchased with borrowed money for the first time in 15 days on the Shanghai Stock Exchange on Friday. The outstanding balance of margin debt on the nation’s two bourses dropped by US$133.9 billion from the peak June 8 to US$231.2 billion through Thursday.

    Some 303 firms have halted trading in Shanghai and 883 in the smaller Shenzhen market. A total of 2,873 stocks are listed on the two exchanges, according to FactSet. While that has come down from last week, it means only about half of the Chinese stock market rebounded strongly Thursday and Friday.

    Trading suspensions remain a frustration for investors, who might otherwise have sold stocks for cash. (SD-Agencies)