Shanghai Shares Stay Shaky

New share trading restrictions announced at the weekend by the authorities offered only a limited boost to China's slumping stocks yesterday, raising the benchmark index by almost 7% as markets opened - only for it to fall back to a 0.7% gain by close of play.

The Shanghai composite index is trading at 3116.98, about half the level of autumn's peak. Although most analysts believe that a correction was needed, the lengthy decline has created concern. Comments from senior officials have added to anxiety. Hou Yunchun, deputy director of the research office under the state council, warned this weekend that there was a possibility of stagflation.

The securities regulatory commission sought to stabilize the market by announcing late on Sunday that shareholders who wanted to sell large numbers of shares freed from lock-up periods would have to use the block trading system. The rule applies when more than 1% of a listed firm's total shares are sold within a month and requires the sales to be made off-market, through private negotiations.

Zhang Qi, an analyst for Shanghai Haitong Securities, said the index dropped because the market overheated, but then continued its decline primarily because of the large number of shares freed from lock-up periods. "Investors' confidence can't be built up in such a short time. So when the index increased a bit they hurried to sell out their shares." He added: "I think now the market is undervalued. The ideal index for now should be 4200 to 4300. "

Zhang Yang, strategist at Orient Securities, warned: "It will take time to heal investors' battered confidence, especially when the economic outlook is not good. The index is still likely to hit fresh lows."

· Additional research by Chen Shi