China stocks took a breather on Tuesday morning following the previous session’s surge, as investors began subscribing for a large batch of initial public offerings (IPOs).

Both the CSI300 index and the Shanghai Composite Index, which jumped nearly 5 per cent on Monday, shed early gains and ended Tuesday morning flat. Hong Kong stocks fell.

IPO subscriptions

Eleven companies, including nuclear giant China National Nuclear Power Co Ltd, started taking IPO subscriptions on Tuesday, while another 12 firms will follow suit on Wednesday.

The flood of IPOs is expected to lock up a total of 8.3 trillion yuan ($1.34 trillion) of cash, much more than previous batches did, according to Xinhua news agency.

But despite the short-term liquidity pressure, and last Thursday’s drastic sell-off in which the main indexes tumbled more than 6 per cent, many investors remained upbeat.

“Overall, we don’t see much change in the drivers’’ of the bull market, said Zhao Yang, fund manager at Bosera Asset Management.

“Another deep correction is quite unlikely. In the short-term, the market may fluctuate within a narrow range at this level; In the long-term, we see a slow bull market.’’

Some analysts say the argument is supported by data showing money keeps flowing into the stock market, adding fuel to the market’s rally.

Chinese mutual funds raised more than 800 billion yuan during January-May, double the amount raised during all of 2014. Also, the outstanding amount of margin financing hit another record at 2.07 trillion yuan on May 29, according to the latest data.

Pledged supplementary lending

The market also drew encouragement from signs the central bank is continuing easing liquidity.

The People's Bank of China has recently provided Pledged Supplementary Lending (PSL) to select banks, two sources with direct knowledge of the matter told Reuters on Monday, as Beijing moves to support longer-term investment amid a slowing economy.

Infrastructure stocks rose on the news. The sector is also benefiting from a decision by the Shanghai Stock Exchange and the China Securities Index Co Ltd to jointly launch an index tracking stocks related to China's "One Belt, One Road" initiative on June 24.

Hong Kong stocks down

Stocks fell in Hong Kong. The Hang Seng index dropped 0.7 per cent to 27,392.64 points, while the Hong Kong China Enterprises Index lost 1.3 per cent to 14,118.56.

Most sectors slipped, with consumer goods and material stocks leading the decline.

Bucking the trend, Perfect Shape PRC Holdings Ltd jumped 6.3 per cent after saying it expects to a significant increase in net profit for the year that ended March 31.

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