The Shanghai Composite halted a two-day sell-off on Tuesday on rumors that the central bank will hold a press conference with financial regulators to address liquidity conditions.
The index closed down 0.2 percent after plunging as much as 5 percent earlier in the session. Still, the index ended in bear market territory, having lost 20 percent from a ten-month high hit in February.
After the market close, the People's Bank of China (PBOC) attempted to ease concerns of a cash squeeze by saying that the seasonal factors leading to tight liquidity would fade. Officials also added that the central bank would guide interbank rates.
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The rest of Asian stocks fell in choppy trade. Japan's benchmark Nikkei index pared losses after skidding 2 percent, Australian equities hit a six-month low and South Korea's Kospi fell to an eleven-month low.
Tight Liquidity Woes
Earlier on Tuesday, the People's Bank of China (PBOC) announced that it would not drain or inject funds into markets despite mounting fears that tight credit among banks will impair economic growth.
The central bank has engineered a tightening of cash in money markets to control excessive credit growth, and strained liquidity conditions have sparked fears of a banking crisis in recent sessions.
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"The dragon economy now resembles a panda," wrote Evan Lucas, market strategist at IG. "Mid-tier bank lending is the life blood of the Chinese economy. Their major clients are small to medium enterprise. These clients are the ones heavily involved in the manufacturing of consumer goods, mid-sized construction and low-end refinement the major driver of the export economy," he added.
Shanghai Down 0.2%
A rebound in banking stocks helped China's benchmark index to cross the 1,950 mark and move off a four-and-a-half-year low, hit earlier in the session.
Mid-sized lenders Minsheng Bank closed down 0.8 percent after tanking as much as 8 percent while Industrial Bank added 0.3 percent following its earlier 6 percent fall.
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"The PBOC feels they have the luxury to moderate credit growth because it wasn't having much impact on the economy anyway and was contributing towards greater risk in the future," said Erwin Sanft, managing director, head of China & Hong Kong equity research at Standard Chartered.
The benchmark's Relative Strength Index (RSI) has declined to 15, from last week's reading of 30. A figure below 30 signals that stocks are oversold and therefore likely to become undervalued.
Nikkei Below 13,000
Japanese equities resumed their volatile trend to enter negative territory following a 1 percent spike earlier in the session on worries over China's banking system.
A strong currency added pressure to exporter stocks, which have a large exposure to China's economy and remain unnerved by volatility in mainland markets. The yen strengthened against the greenback to trade around 97.3 per dollar, higher than Monday's 98.7 handle.
Silicon producer Sumco and optical fiber maker Furukawa both fell nearly 6 percent, while tech manufacturer Oki Electric lost 5 percent and air conditioner maker Daikin Industries declined over 4 percent.
Sydney Down 0.3%
The sell-off in Australian equities was relatively contained in comparison to the rest of Asia thanks to a weaker Australian dollar. The currency traded at $0.9257 against the greenback, well-off an overnight 33-month low of $0.9148.
Struggling retailer Billabong surged 46 percent after announcing that refinancing talks with potential suitors Altamont Capital Partners and Sycamore Partners were advancing.
Resource stocks continued to drag after copper and gold prices extended steep losses on Monday, leading the benchmark S&P ASX 200 to fall below the 4,660 mark to its lowest levels since January.
Gold miner Perseus Mining declined 23 percent after issuing a profit warning, while Panoramic Resources fell 11 percent. Oil and gas producer Linc Energy tanked 13 percent following a fall in crude prices.
Australian Infrastructure Fund dived 98 percent after undergoing changes in holdings from Wilson Asset Management Group.
Kospi Down 1%
Seoul shares tracked Asia-wide volatility, led by a decline in exporters as foreign investors extending their selling streak for a twelfth straight session. The benchmark index fell below 1,800 points to its lowest levels in nearly a year.
Pharmaceutical maker United Pharm and shipper STX Pan Ocean tanked 15 percent, while electronics maker Samsung SDI lost 2.5 percent.
Autos rebounded sharply as the yen strengthened. Hyundai Motor jumped 2 percent while Kia Motors rallied 3 percent.
— By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC