May 31, 2017 / 5:12 AM / 3 years ago

China stocks give up gains on worries share rules may backfire; HK flat

* SSEC +0.1 pct, CSI300 -0.1 pct, HSI -0.1 pct

* China’s share sales rules may have unintended consequences

* China property shares jump on performance expectations

SHANGHAI, May 31 (Reuters) - China stocks opened sharply up on Wednesday in response to regulators’ move to restrict “bulk selling”, but by midday the main indexes surrendered all the gains, underscoring fragile investor confidence and fears the government’s heavy-handed intervention could backfire.

Most sectors fell, with sentiment barely aided by a survey showing China’s manufacturing sector grew faster than expected in May.

Not long after the markets reopened following the Dragon Boat Festival holiday, both the blue-chip CSI300 index and the Shanghai Composite Index jumped over 1 percent, but they ended the morning roughly flat, at 3,476.07 points and 3,112.11 points, respectively.

The initial euphoria - triggered by government rules published over the weekend to restrict “intensive” and “viscous” selling by shareholders - quickly evaporated as investors contemplated the rules’ side effects.

Regulators’ intention is to prevent massive selling of shares and stabilize the market, but for those shareholders who had no intention to sell, the rules “would prod them to sell sooner, for fear sales restrictions would only become tougher in future,” said Wang Yu, strategist a Pacific Securities.

“The market performance also reflects weak sentiment.”

Echoing Wang’s view, UBS strategist Gao Ting wrote:

“The new regulations could be easily interpreted as stabilizing the market in the short term ... However, we don’t think this is a decisive factor that could determine medium-range movements in the stock market.”

Investors largely looked past the official Purchasing Managers’ Index (PMI) survey that added to broader signs that downward pressure on China’s growth has eased lately. Economists, however, generally agree momentum in the world’s second-largest economy will slow over the year as authorities crack down on debt risks and credit gets squeezed.

Most sectors fell, but the real estate sector jumped over 2 percent by midday, encouraged by stellar gains of Hong Kong-listed property shares recently, as well as expectations of forecast-beating performance by listed developers.

Hong Kong market was roughly flat by the lunch break.

The Hang Seng index dropped 0.1 percent, to 25,680.59 points, while the Hong Kong China Enterprises Index was unchanged at 10,619.81.

Reporting by Luoyan Liu and John Ruwitch; Editing by Shri Navaratnam

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