* New policy expected to curb risk appetite, but implementation will happen over time
* Shanghai index hit two-month low before rebounding
* Analysts expect more financial regulation to come (Updates with details and quotes)
By Samuel Shen and Andrew Galbraith
SHANGHAI, Nov 20 (Reuters) - China stocks tumbled early on Monday after Beijing unveiled sweeping new guidelines to regulate asset management products, but they rebounded and ended the day higher as investors realized the rules will only be implemented gradually.
Government bonds saw a flurry of early buying, but as with stocks the action reversed course, pushing yields on 10-year treasuries up slightly.
The new guidelines, issued by the central bank on Friday, are the latest in a barrage of policies to curb risky shadow banking, which has channeled money into Chinese stocks, bonds and property.
“Regulations on the asset management industry can only continue to tighten and won’t relax, this is very clear,” said David Qu, markets economist at ANZ in Shanghai.
Qu said the new policy’s significance was underscored by the fact that it was the first substantial measure to emerge after the inaugural meeting this month of the government’s newly formed Financial Stability and Development Committee.
At the end of 2016, the collective outstanding volume of the asset management business was 102 trillion yuan ($15.38 trillion).
Analysts expect the new rules to dampen the appetite for riskier assets, but they will not take full effect until mid-2019.
Shanghai’s benchmark index SSEC tumbled as much as 1.4 percent to a two-month low, and the blue-chip CSI300 Index dropped as much as 1.5 percent, before both reversed course and rose into positive territory as bargain hunters piled into blue chips such as banks.
The SSEC closed up 0.3 percent and the CSI300 ended the day up 0.6 percent.
“Tougher financial regulation is not totally unexpected,” said Chen Yong, strategist at Lianxun Securities Co.
“Therefore, selling in the morning was seen as a bargain hunting opportunity for investors who believe it’s still a slow bull market.”
Yields on 10-year Chinese treasury bonds were hovering just shy of 4 percent after reaching three-year highs last week.
The draft guidelines will unify rules covering asset management products issued by all types of financial institutions, and will set leverage ceilings on such products.
There will be a transition period that lasts until June 30, 2019.
Still, there was a psychological impact on the market.
“Tougher rules on banks’ wealth management products will seriously curb money flows into the stock market from lenders,” Li Haoshu, analyst at Chuangcai Securities, wrote in a market comment.
“In addition, restrictions on leverage will hurt liquidity levels, and hurt risk appetite.”
Li Huiyong, an economist at Shenwan Hongyuan Securities, said liquidity and market yields could suffer from the new rules, which stipulate that financial institutions must end the practice of providing investors with implicit guarantees against investment losses.
“The new guideline is not the last shoe to drop, or the last piece of bad news,” Li said. “The era of tough financial supervision has just begun.” (Writing by John Ruwitch; Editing by Kim Coghill)