World Markets

China stock exodus: When will it end?

Premature to say China's meltdown is over: Pro

Chinese equities remained volatile Tuesday following an initial stampede out of the market, with analysts cautioning that there is no clear end in sight to the drama.

"China is probably one of the most, if not the most, margin financed markets of all time – so comforting yourself that the unwind is done – because we've seen a lot of that unwind in the past couple of weeks - is probably somewhat premature," Chris Konstantinos, director of international portfolio management at Riverfront Investment Group, told CNBC.

"[Also], I still don't think you're at a position where you've really got a lot of valuation support," he added.

The benchmark opened down over 4 percent on Tuesday, swinging between losses and gains over the course of the morning session, as investor sentiment remained shaky despite a fresh commitment by Beijing to put a floor under the market. The index traded down as much as 5.1 percent.

"The market sentiment is extremely fragile so when investors see selling pressure, they compete to sell their stocks," Dickie Wong, executive director at Kingston Securities, told CNBC.

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A day earlier, Shanghai stocks nose-dived 8.5 percent, their biggest one-day decline since 2007, on heavy margin selling amid concerns that authorities were starting to scale back on measures to prop up stocks.

The monstrous fall that caught many investors off guard, however, prompted regulators to once again vow their support for the beleaguered market.

Following the market close on Monday, the country's securities regulator said it was prepared to purchase shares to calm the market and stave off systemic risks, Reuters reported. It also said authorities would deal severely with anyone engaged in the "malicious shorting of stocks."

On Tuesday morning, the central bank used reverse-repurchase agreements to pump 50 billion yuan into the banking system – the largest amount of funds through open market operations since July 7 – and said it would use various monetary tools to maintain appropriate levels of liquidity, according to Reuters.

So far, policy intervention aimed at shoring up investor confidence has had only a short-lived effect.

Why it's hard to gauge China's stock rout

Since the end of June, the government has stepped in with a muddled medley of measures – from monetary policy easing to a freeze on initial public offerings (IPOs) - to rescue the market from its swoon.

While its "kitchen sinking" approach helped initially, Monday's plunge erased almost half the gains the market has posted over the past two weeks.

"To me it's just another painful lesson that what goes straight up is not sustainable – [there are] lots of margin accounts [with] individuals holding them - that's not a recipe that ends well," Mark Eibel, director of client investment strategies for Russell Investment, told CNBC.

So, where do investors go from here?

For those with a strong stomach for volatility and a longer investment horizon, strategists recommend gaining exposure to H-shares, or Hong Kong-listed mainland stocks.

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"If you don't mind trying to catch a falling knife, the H-share market valuations are starting to get down in the range where there's long-term valuation support. That market is trading as sub-10 times [price-to-earnings]," Konstantinos said.

"For the really risk-tolerant, watching the H-share market may be interesting," he said.

But, investors should keep in mind that trading in the Shanghai market tends to influences the performance of the Hong Kong-listed stocks.

"A lot of Chinese investors do hold Hong Kong stocks," Andrew Sullivan, managing director for sales trading at Haitong International Securities, told CNBC. "Once the stocks hit 10 percent down in China, you can't sell them. So if you can't sell in Shanghai then you have to look in other markets where you can sell. That's why Hong Kong got some of the flak."