China's government has been meddling in the markets by buying shares in the country's four big banks, a move analysts expect to continue until jitters about high interbank lending rates and concerns about the economic outlook ease.
Central Huijin Investment, which holds Beijing's investments in state-owned financial firms, bought shares in Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China, statements to the stock exchange on Monday showed.
This marks the latest effort to bolster confidence in the benchmark Shanghai stock index, which last week fell to its lowest level since mid-December.
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"There's no question that the Chinese banking system is supported by the government, which controls Huijin. So if it needs to do more it will," Uwe Parpart, the head of research at Reorient Financial Markets told CNBC Asia's "Cash Flow."
"It is the right thing to do and we've seen that in the U.S. and Europe as well, so why shouldn't China take a lesson from Henry Paulson?" he added, referring to the former U.S. Treasury secretary who presided over the bailouts of U.S. banks during the global financial crisis.
Tight liquidity conditions, structural changes in China's economy and uncertainty about the economic outlook have been weighing on Chinese stocks, analysts say. A growing number of market watchers have downgraded their forecasts for growth in recent weeks amid disappointing economic news.
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The Shanghai Composite Index is down about 5.8 percent so far this year, making it one of the worst performing major equity markets in Asia.
And even after the news about China's latest efforts to shore up the equity market, the benchmark index slipped 0.4 percent on Tuesday and the shares of China's four big banks traded in Hong Kong fell between 0.6 to 1.25 percent each.
"The Chinese banks are having difficulties because the government is trying to liberalize interest rates and that means bank profits are being squeezed," said Parpart. "The new government is bent on structural change overall and whenever this happens, the first reaction is negative and Huijin wants to protect the banks," he said referring to Beijing's plans to restructure the Chinese economy away from investment and exports towards consumption.
Central Huijin Investment spent about $59.2 million buying bank shares on June 13, according to Reuters calculations based on stock exchange filings.
"I wouldn't be surprised that China is buying shares in the banks. Because China needs to boost consumption and if stock market prices go down sharply that's not good for consumption," said Dariusz Kowalczyk, Senior Economist and Strategist, Credit Agricole.
"They [the government] have the fire power to do so and they can engineer a rebound in stock prices," he added, saying that high money market rates in China were hurting stocks because they increased the cost of funding investments in assets such as the equity market.
Analysts say that tightness in China's money markets is reflected in the 7-day repo rate, a key indicator of market liquidity, which rose to almost 7 percent last week compared with an average level of 3 percent over the past year.
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According to Morgan Stanley Chief Asia Equity Strategist Jonathan Garner, the bank-share purchases by Beijing could be a sign that Chinese shares have reached a trough.
"In our observation those purchases tend to be close to equity market troughs," he said, adding: "The market has sold off more than warranted."
— By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: