A swift, steep drop in China shares flipped to gains Wednesday, the latest signal that Beijing won't let the market fall too far before engineering a rescue.
The Shanghai Composite Index, which fell as much as 5% earlier, ended up 1.2% at 3794.11 and the smaller Shenzhen Composite gained 2.2% to 2222.05. The startup-dominated ChiNext board gained 2.7% to 2570.69.
Meanwhile, the volatility hitched off further losses in Hong Kong's Hang Seng Index, which has wiped out all year-to-date gains. The index fell 1.3% Wednesday, while a gauge of Chinese companies listed in the city lost 1.2%.
China's trading partners in the region also racked up losses. Japan's Nikkei Stock Average fell 1.6% while South Korea's Kospi fell 0.9%.
The U-turn came after a handful of companies disclosed their biggest shareholders, some of which included state-backed firms. Analysts say that gave investors a sense of security in Beijing's market role.
Afternoon rallies aren't uncommon, as investors who anticipate Beijing might step in during the final minutes of trading ramp up buying to ride the gains.
"It's a clear sign that the government is intervening in the market…otherwise their previous efforts would have been in vain," said Zeng Xianzhao, a manager at Nuoding Asset Management.
In a company filing midday on Wednesday, Dongxu Optoelectronic Technology, disclosed that its third- and fourth-largest shareholders as of August 14 were China Securities Finance Corp., the state-run firm tasked with propping up the market, and Central Huijin Investment, the domestic investment arm of China's sovereign-wealth fund. Stock of the company, which manufacturers electronic-accessory components, hit its upward daily limit of 10%.
Also Wednesday, Zhefu Holding Group, which manufacturers turbine generators, disclosed that Central Huijin is the company's biggest shareholder, according to a filing on the Shenzhen stock exchange. Its shares also limited up.
While not all companies counting state-backed firms among their biggest shareholders gained Wednesday, the announcements offered enough of a confidence boost to spill into the broader market.
Some 173 stocks reached their upward daily limited Wednesday, with just nine falling to their downward limit on the Shanghai and Shenzhen exchanges, according to Wind Information Co.
Earlier Wednesday, China's main stock index fell within a whisker, some 51.2 points, from the low set on July 8—before Beijing's massive stock-rescue operation, which spanned from directing state funds to buy shares to halting initial public offerings and sending police after "malicious" short sellers, kicked into gear. On Tuesday, the central bank poured a huge amount of cash into the financial system to offset capital flight after devaluing the yuan last week.
Though the gains recoup some losses from a 6.1% drop in China's main index on Tuesday, Shanghai is down 27% since its June peak.
Meanwhile, the startup-dominated ChiNext Price Index came within just seven points of its July low. Valuations on the index are still staggering—with an average price-to-earnings ratio of 87. That's not far from the stratospheric valuations on Nasdaq at the height of the tech bubble in the 2000s.
Some analysts say the late-morning tumble reflects selling by brokerages trying to cover losses from Tuesday. Brokerages often impose so-called margin calls in the midmorning and around 2 p.m.
"The big picture is the state of margin unwind is still taking place, which means things are still going to remain unsettled for a while," said Nicholas Teo, a market analyst at CMC Markets.
Using borrowed money to buy stocks—through margin financing—accelerates gains as shares rally, but also hastens losses on the way down, as investors sell to cover their positions.
Monday showed the first drop in margin lending for stock purchases in eight days, by 20.5 billion yuan ($ 3.2 billion), as unwinding of loans used to fund stock purchases outstripped fresh leveraged bets on Chinese stocks, according to data from CEIC.
Margin loans totaled 1.4 trillion yuan as of Tuesday, according to Wind Information Co. compared with a peak of 2.26 trillion in June.
Investor jitters come despite the central bank's latest moves to stem outflows from China, after devaluing its currency last week. On Tuesday, the People's Bank of China poured the largest amount of cash into the financial system on a single day in almost 19 months.
Despite the latest stock turmoil, the Chinese currency has held relatively steady after the central bank devalued the yuan by nearly 2% last week. On Wednesday, China's central bank set the yuan's trading midpoint nearly flat with the level a day earlier, at 6.3963 per U.S. dollar. The currency can trade within a 2% band above or below that. The onshore yuan is currently at 6.3947 against the U.S. dollar.
That said, the prospect of slackening demand from China, one of the world's largest consumers of oil, metals and food, and concerns about oversupply have pushed many commodities to multiyear lows, particularly industrial metals. On Tuesday, copper futures fell below $ 5,000 a metric ton for the first time since the financial crisis.
On Wednesday, Brent crude oil futures recovered some losses, last up 0.2% to $ 48.88.
One bright spot was Australia's S&P ASX 200, which rose 1.5%, with gains in what had been the most-battered sectors: banks and energy stocks.
Still, challenges remain on the horizon. IG Market strategist Evan Lucas said the macroeconomic backdrop and state of commodities markets makes it hard for investors to be positive, who noted the index is down more than 10% from an April high of 5999.
—Yifan Xie, Gregor Stuart Hunter and Robb M. Stewart contributed to this article.
Write to Chao Deng at Chao.Deng@wsj.com
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