SHANGHAI, Nov 24 (Reuters) - Chinese stocks ended a choppy day little changed on Friday after suffering their biggest selloff in months the previous session, reflecting a clash between bulls and bears over the implications of fresh government steps to reduce financial risks.
While some investors used Beijing's latest crackdowns on shadow banking and micro-lending as an excuse to take profits after a solid rally this year, others were out bargain hunting, betting the regulatory measures will reduce systemic risks.
Afternoon buying put a floor under the blue-chip CSI300 Index, which ended the day up 0.04 percent at 4,104.20 points.
It had tumbled nearly 3 percent on Thursday, its worst one-day loss in nearly 18 months, and was down earlier on Friday.
The broader Shanghai Composite index rose 0.06 percent to 3,353.82, after skidding 2.3 percent the previous day in its worst performance since December.
Financials led the gains, highlighting optimism in some quarters that tough steps to reduce risk and leverage will ultimately be a good thing for Chinese banks.
Brokerage CLSA reiterated its "BUY" rating on China's Big 4 banks, saying in a note to clients on Friday that lenders such as ICBC will benefit from a more positive economic outlook, rising net interest margins, and falling bad loan ratios.
That view was echoed by China International Capital Corp (CICC), which said China's banking industry should be revalued upward, as tough rules against shadow banking would dispel worries over lenders' asset quality.
But others felt Chinese stocks' strong run wouldn't last much longer.
"We have seen a bull run in blue chips this year. But no matter how good a company is, its price cannot go up forever," said Wu Kan, head of equity trading at Shanshan Finance.
"Fund managers who have embraced those high-flying stocks are under pressure to lock in profit" as year-end approaches, he said.
Influential hedge fund manger Shanghai Chongyang Investment Management Co said in a note: "There had been too much consensus among short-term investors toward blue-chips, and trading had been excessively concentrated ... which would easily lead to high volatility.
"If the market can cool down at this level...that would be good for healthy development of the market."
For the week, the CSI300 was down 0.4 percent and the Shanghai Composite Index was down 0.9 percent.
On top of a series of fresh regulatory measures, a rout in China's bond markets has added to investor worries by driving up corporate borrowing costs, which will pressure earnings.
The benchmark 10-year treasury bond yield hit a three-year high of 4.03 percent on Thursday, though it pulled back slightly on Friday and bond futures edged up 0.3 percent .
The yuan currency traded around five-week highs on the back of the weaker dollar.
A fund analyst said policy tightening fears had not spread to China's notoriously speculative commodity markets, which have seen wild swings to multi-year highs.
Buoyed by forecast-beating economic growth and robust earnings, Chinese stocks have been on a tear. Before Thursday's fall, the CSI300 had risen more than 26 percent since early May, while the Shanghai Composite was up about 13 percent.
Thursday's fall looked "a lot more like a natural retracement from overbought levels after a strong run-up than the beginning of a rout", Chen Long, China economist at Gavekal Dragonomics, wrote in a note on Friday.
"If anything, it offers a buying opportunity as both fundamentals and investor positioning suggest the bull market has further to run."
But signs of Beijing's stepped-up "de-risking" campaign come as investors have been borrowing more to bet on blue chips, lured by sharp gains and a chorus of upgrades from increasingly optimistic analysts.
Outstanding margin financing - money investors borrowed from brokerages to buy stocks - has exceeded 1 trillion yuan ($151.90 billion) for the first time in almost two years.
Investor bets have been highly concentrated in a group of industry leaders which have far outperformed the broader market, including insurance giant Ping An, liquor maker Kweichow Moutai and chip-maker BOE Technology .
But there are signs regulators are growing nervous about frothy valuations.
In a rare move, the Shanghai Stock Exchange sent a letter to Essence Securities on Monday, questioning the rationality of the brokerage's Nov. 16 report that raised Moutai's target price to 900 yuan - 25 percent higher than its price at the time.
Earlier this the month, the state news agency Xinhua and the company itself warned that the share price was rising too fast.
Moutai's shares have dropped about 12 percent since their peak on Nov. 16, and were down 0.6 percent on Friday, but are still up around 88 percent so far this year.
Worries about tighter lending regulations have pushed the yield on 10-year treasuries up by nearly 40 basis points since the end of September, despite frequent and hefty central bank cash injections into money markets.
Some of the new asset management proposals "target investment firms that borrow short-term funds to invest in longer-term debt. Such a strategy is risky, given the high leverage ratio," economists at DBS Bank said in a note this week.
The yield on 5-year AAA corporate debt rose to its highest level in more than three years amid the selloff.
"The government's determination to reduce leverage has not been fully priced in by the market yet," said Gu Weiyong, chief investment officer at bond-focused fund house Ucom Investment Co, adding that stock investors had been particularly slow to react.
"Shadow banking had been a big supplier of liquidity to risky assets, so the reallocation of money to be triggered (by the new rules) will have a big impact on asset prices." (Additional reporting by Winni Zhou, Liu Luoyan and Ruby Lian; Editing by Shri Navaratnam and Kim Coghill)