Stocks on the mainland surged in the final hour of trade on Friday, marking the second day of rallies. The benchmark Shanghai Composite Index jumped 4.8 percent to close at 3,232.35.

This came amid signs of fresh support from Beijing, with the Ministry of Finance saying it is studying whether pension funds will start investing in stocks and other assets.

However, gains in major indexes of mainland stocks were tempered by weakness in banks as most mainland lenders reported virtually no profit growth and mounting bad loans in the first-half.

The world's biggest bank, the Industrial and Commercial Bank of China Ltd, dropped in both the Hong Kong and mainland markets on Friday, while both Bank of China Ltd and China Construction Bank Corp closed flat in the mainland market despite the good showing from the Shanghai Composite Index.

Defensive stocks are highly recommended currently with mainland equities undergoing wild swings, said David Cui, head of China equity strategy at Bank of America Merrill Lynch. However, he is bearish on the financial sector on concerns over their balance sheets.

"Non-financial State-owned enterprises and utility stocks, as well as gas and oil companies, are better choices now," said Cui. "I am cautious on overvalued sectors such as e-commerce and the Internet."

A crisis of confidence appears to be brewing on the mainland as the Shanghai Composite Index fell below a key support level of 3,000 points earlier last week, a level that authorities have previously defended fiercely, said Steven Wang, research director at Reorient Financial Markets. The index fell 7.85 percent for the week despite advancing the last two days.

The start of the week saw vast sell-offs in global financial markets triggered by the 8.49 percent slump in Shanghai on a grim "Black Monday", its biggest percentage decline since February 2007, and more than 15 percent of its value was wiped out on Monday and Tuesday.

"Investors in mainland shares should reduce long positions unless any renewed government support or a clearer bottom is set," said Wang.

Cui is also not very hopeful about the long-term performance of mainland shares as their valuations are high.

However, analysts overall believe mainland stocks will stabilize beyond 3,000 points in the short term. "The coming (Sept 3) military parade will boost sentiment as investors believe the government will not allow stocks to swing too much in the lead-up to the parade," said Ben Kwong Man-bun, a director at securities firm KGI Asia Ltd.

Hong Kong stocks, however, ran counter to mainland stocks, losing 1 percent to 21,612.39 on Friday and erasing gains made in early trading. "Investor confidence remains weak," said Kwong. Some investors may take profit on concerns about unsustainable rallies in Hong Kong stocks.

As many as 38 companies out of the 50 listed on the Hang Seng Index closed lower, with Bank of Communications Co Ltd leading the drop at 4.73 percent.

celia@chinadailyhk.com

(HK Edition 08/31/2015 page7)