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Can Stimulus Save China Stocks From Year Lows?

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Chinese equities fell to their lowest levels for the year on Thursday on fresh signs of weakness in the world's second largest economy. While stumbling growth in the manufacturing sector could prompt a fresh round of stimulus from the government, it will have a limited impact on slumping Chinese stock markets, analysts told CNBC.

(Read More: Will the Fall in New Factory Orders Trigger China Action?)

"I think the difference here is the sort of stimulus that is put is often in infrastructure projects rather than a direct QE [quantitative easing], which would have a different effect on the system [markets]," Jason Hughes, head of sales trading, CMC Markets said, referring to the government's $150 billion-plus infrastructure spending package last year.

The final HSBC Purchasing Managers' Index (PMI) dropped to 50.4 in April from March's 51.6. China's official PMI on Wednesday painted a similar picture, falling to 50.6 in April from an 11-month high of 50.9 in March as new export orders fell, Reuters reported. Fifty divides expansion from contraction on a monthly basis.

This data triggered a fall in Asian markets on Thursday with the Shanghai Composite falling to 2,161 points in early trade, its lowest level since December 25. But the benchmark has since recovered, ending the day at 2,174.

(Read More: Is China on a 'German -Style' Growth Plan?)

Hughes says the modest turnaround is more due to bargain hunting than market expectations of easing.

"It was more a case of potential bargain hunting given the fact that we were back at the lows," Hughes said. "Chinese stocks, after an uplift at the end of last year and the first month of 2013, have remained relatively under pressure with seeming lack of confidence to invest in equities."

Mainland stocks rose around 7 percent between January and February 7, but have since given up all the gains and are down 10 percent.

Audrey Goh, investment strategist at Standard Chartered Bank, said while further downside in Chinese stocks is limited given the current low valuations, there isn't much of a catalyst either to push them higher, unless economic data out of the country improve significantly. Goh expects Chinese equities to stay rangebound in the near-term.

"I think the Chinese government has also given their intention for slower, but more sustainable quality growth going forward, rather than the rapid pace they've been growing in the past," Goh said. "I think the market has to recalibrate expectations to what the government is looking for."

As China is trying to make the transition from an investment-led to a more consumption driven economy, growth has slowed. The Chinese economy grew at 7.7 percent in the first quarter of this year, less than the 7.9 percent pace set in the previous quarter, but in keeping with a government target of 7.5 percent for 2013.

(Read More: China's Q1 GDP Growth Slows Unexpectedly to 7.7%)

Amid the current economic environment, Hughes is bearish on Chinese equities and doesn't expect confidence to return to the market anytime soon.

"The sentiment in China seems to be a little bit softer than elsewhere, part of that is when you look at the U.S. or Japan, it's the flood of money coming in from the QE program supporting the stock prices as much as anything else. Whereas you don't really have that in China," Hughes added, referring to the U.S. Federal Reserve's three rounds of monetary easing and the recent announcement by the Bank of Japan to pump $1.4 trillion into the economy.

While the Chinese government "definitely" has room for much more aggressive easing according to Hughes, he thinks they are taking a much more cautious approach right now. The central bank cut interest rates and the reserve requirement ratio (RRR) for banks twice each last year.

"To be fair they still have growth rates firmly above 7 percent, which is still very healthy compared to other large economies," Hughes said. "So the need to adopt a QE related program to foster half a percent of growth or something is not necessarily there."

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

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