Chinese stocks fell slightly on Wednesday after the central bank said it had injected liquidity to selected lenders, but analysts cautioned it could take time to recover from this week's falls.
The benchmark Shanghai Composite Index fell by 0.41 percent to 1951.50 on Wednesday with turnover shrinking to 80.9 billion yuan ($13.2 billion) from 104.7 billion yuan on Tuesday.
The People's Bank of China said on Tuesday evening that it has recently supported some financial institutions with liquidity to ease a cash crunch, adding that it will lend further support to stronger players if they face a shortage of funds going forward.
"To maintain the stable operation of the money market, recently the central bank has provided liquidity to some qualified financial institutions," the PBOC said on its website.
Eric Wan, an analyst with Soochow Securities, said investor confidence had been "severely hit" by a series of negative messages including the liquidity tightening, the scaling back of quantitative easing in the US, and a weak economic recovery in China.
"The central government has indicated it will not intervene with the recent stock market retreat. The weak fundamentals are likely to last to September," he added, noting some traditional industries, including the consumer goods industry and those with strong interim report predictions, might attract more capital during the period.
Sectors including banking, coal mining and steel led the fall on Wednesday, while culture and media, IT and pharmaceutical companies saw their share prices rise.
China's Nasdaq-style Growth Enterprise Board Index based in Shenzhen surged by 5.5 percent on Wednesday,
Analysts are divided on whether fund supply will improve in the near future.
Kelvin Tay, the regional chief investment officer of Southern Asia-Pacific at UBS Wealth Management, forecast another 5-8 percent fall in the Shanghai Composite from current levels in the coming days, based on concerns over a prolonged liquidity lightening policy from China's central government.
Dariusz Kowalczyk, senior economist at Crdit Agricole in Hong Kong, wrote in a note on Wednesday that the negative impact of the liquidity squeeze on markets, future credit growth and business and consumer sentiment, was likely to force policymakers to ease monetary and fiscal settings in the second half of 2013.
He also expects a liquidity-boosting open market operation or a reserve requirement ratio cut if the liquidity situation does not return to normal next month.
The country's benchmark Shanghai Composite Index has fallen 15 percent so far this month, reversing a 1.4 percent gain over the previous five months.
Jiang Xiangyang, deputy director of the China Securities Regulatory Commission's general office, told a media briefing in Shanghai on Tuesday, the regulator will take steps to improve the market environment and shore up market confidence.
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