TAIPEI, Taiwan (TheStreet) -- Is the worst over for Chinese stocks?

China's benchmark stock exchange appears to have stabilized after a free fall that shook financial markets around the world.

Helped by government intervention, the Shanghai Composite Index has been trading within a relatively narrow range since early July. Before that, Chinese stocks had soared about 150% over the past year, only to plunge more than 30% starting in June.

Those swings, caused by the extremes of margin trading among mom-and-pop Chinese investors, had initially energized foreign funds but later prompted many to cut positions.

The benchmark exchange has held relatively steady over the past five weeks largely because Beijing's market regulators will not let it drop below 3,500, per widespread reports and analyst speculation. Some believe authorities in the Communist government also won't let it surge past 4,500, effectively keeping it range-bound.

Chinese authorities would intervene, extending rescue measures taken last month, if Shanghai's "A" share prices pushed below 3,500. The index was trading around 3,900 on Monday.

"Today's prices are largely where they are because of the intervention from the government," said Nitin Dialdas, chief investment officer with Hong Kong fund manager Mandarin Capital. "The floor at 3,500 should hold though as the government has set that as the level in which it will act, and it still has some ammunition left for any future attempts to break below that level."

China's ban on short selling, though possibly to be revisited, indicates that investors have "come in at the 3,500 level knowing that is where the government support has come in," Dialdas added.

Authorities also may be weighing new curbs on margin lending, which had doubled over six months to $322 billion in May. 

Foreign funds returned to the market in mid-July after state rescue measures showed early signs of controlling the fall.

Individual foreign investors cannot buy and sell 'A' shares on their own. However, they can invest in the China funds offered by some of the 276 offshore institutions with special government quotas to trade in domestic markets.

They can pick, for example, the Fidelity Emerging Asia Fund  (FSEAX - Get Report) or the Morgan Stanley China A Share Fund  (CAF - Get Report); likewise, China products under U.S.-traded Morgan Stanley  (MS - Get Report) or HSBC  (HSBC). Some individual foreign investors buy into exchange-traded funds such as Market Vectors China ETF  (PEK - Get Report).

Relief from volatility, with market support from Beijing, should allow foreign China funds to pick shares according to company fundamentals rather than fretting over broad up and down trends, although with lingering caution about the high valuations that had caused anxiety before the slump.

"Large index stocks in China, banks in particular, are attractive valuation wise," said Michael McGaughy, money manager and consultant with Yuan Asset Management in Hong Kong. "However, many 'A' shares are still not that cheap despite their fall."

 

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.