TAIPEI, Taiwan (TheStreet) -- China appears to have found a way to stabilize its unruly stock market, which plunged over 30% in less than a month.
And the steps to rein in the wild swings in Chinese stocks could have a lasting impact, analysts say.
A series of government rescue efforts, especially institutional buying and curbs on margin lending, has reversed the dangerous drop in Chinese shares that has rattled markets in the U.S. and around the world.
Chinese stocks rose sharply Thursday and Friday after the government suspended trading in many shares and placed limits on how much investors can sell off.
Analysts applauded the moves and said the worst might be over.
"There's got to be longer-term upward pressure on the market," said Jack Perkowski, managing partner of merchant bank JPF Holdings in Beijing. "We may be out of the woods."
Government intervention that steers China away from mom-and-pop margin trading -- the chief cause of the 30%-plus freefall since June 12 -- will help the market escape volatility that dogged it even before the slide.
Stocks gained 150% over the year before the recent fall as retail investors began parking assets in stocks instead of the increasingly restrictive property market.
Many of those investors bought shares on margin loans, and when stocks began to slip, they sold to pay back lenders, compounding market losses.
Overall margin balance has already shrunk 25% from its peak, said Charles Salvador, investment solutions director with Z-Ben Advisors in Shanghai.
China is trying to ease the impact of margin trades by pumping more money into the state-owned China Securities Finance Corporation, which provides margin loan services to brokerages. But this measure is a seen as stopgap only. The government is expected to take longer-term moves to curb margin lending, as it did in April, because officials realize that practice caused the share price losses since June.
"They didn't quite appreciate what [the lending] would do," Perkowski said.
China's approval for a first-time stock market investment of up to $327 billion in pension funds and pledges by the top 21 securities brokerages to invest a joint $19.3 billion in exchange-traded funds may begin steering the market toward seasoned institutional investors, heralding more stability.
A prolonged fall in Chinese shares would hurt consumer spending, which Beijing hopes will grow into a pillar of the $10 trillion-plus economy.
Once margin trading is under control, the Shanghai market will settle into a groove between 2,500 and 4,000, analysts say, giving timelines from this month to later in the year. Only then would it be safe for foreign investment, though some funds are moving already.
"We anticipate the government will take further short-term measures to contain the decline," Salvador said. "Once the dust has settled on the margin issue and speculative selling, I anticipate seasoned international investors who have experience in 'A' shares are going to look at valuations and fundamentals in search of opportunities rather than run for the exits."
Foreign investors were buying into exchange-traded Chinese funds Thursday, a reflection of market confidence. The Direxion Daily China 3x Bull (YINN - Get Report) had gained 17% Thursday from one-week low a day earlier and the iShares China Large-Cap ETF (FXI - Get Report) picked up nearly 7% over the same period. The benchmark Shanghai Composite Index rose 5.7% Thursday and another 4.5% Friday.
Offering an extra boost, about half of China's 2,808 listed firms had suspended trading as of Thursday. The China Securities Regulatory Commission also slapped a six-month selling ban on investors with more than 5% stakes in any listed firm, forcing them to hold their positions.
"I would guess that investors are putting money in because they believe that equities will rise in the future and offer a return, and suspension of trading would prevent any price changes until the suspension is lifted," said David Rees, an economist at London-based Capital Economics.
China bars individual foreign investors are from picking up "A" shares but allows trading by 271 overseas institutions with state-issued quotas.
Retail investors who want a piece of the China market can put money in the mutual funds of those institutions. Examples include the Goldman Sachs China Equity Fund Class "A" Shares (GNIAX) or the Fidelity Emerging Asia Fund (FSEAX - Get Report).
Valuations that had soared into the double digits are naturally down -- an immediate incentive to buy shares. China is cheaper than the U.S. and global emerging markets at a 9.5 price-earnings ratio, said Jay Jacobs, research analyst with Global X Management in New York.
"Every market participant will have a different perspective on China's equity markets, ranging from buyers searching for value opportunities to sellers who are dissuaded by the recent volatility," Jacobs said.