Chinese stocks staged a spectacular comeback yesterday after Wednesday's horror losses.

The Shanghai Composite Index initially dropped by more than 3 per cent after trading commenced, before gaining back ground after the China Banking Regulatory Commission said it would relax margin requirements.

Investors with holdings of more than 5 per cent, as well as corporate executives and directors, have also been prohibited from selling their holdings for six months.

Meanwhile, Chinese police and security regulators yesterday launched a joint probe into "vicious short-selling" - profiting from falls in the country's volatile equity markets.


The Shanghai index, which fell 5.9 per cent on Wednesday, was up 4.9 per cent at 6pm, while the Shenzhen Composite Index had gained 3.6 per cent.

Hong Kong's Hang Seng index was up 4.6 per cent.

JBWere investment strategist Bernard Doyle said there was still an element of nervousness in the market despite yesterday's gains in China.

"Because the Chinese authorities have got so involved in the market with various stimulus measures - boosting lending and that sort of thing - it's hard to know what's fact and what is fiction in terms of what's going on in pricing," Doyle said. "It remains to be seen as to whether this is a sustainable bounce, but it's a positive start."

At least 1331 firms on the Shanghai and Shenzhen stock exchanges have halted trading - freezing about 40 per cent of the country's market capitalisation.

"I think the whole past week has been a very live lesson in how not to handle a market sell-off." Doyle said the Chinese market had required a correction after rising so sharply over the past year.

"It is absolutely a healthy thing that it's had a good shake out."