(Bloomberg) -- A small-caps crash. Dizzying rebounds. And cooling gains. Yet another wild week for Chinese stocks has left investors yearning for more policy support as they remain unconvinced the market has reached a bottom.

Beijing’s intensified efforts to halt the equity rout helped the benchmark CSI 300 Index stage a sharp rebound but its gains slowed before the market shut for the Lunar New Year break. A slide in Hong Kong-listed Chinese shares on Friday further signaled that skepticism is still running high, dampening the holiday spirit. 

Investors are bracing for more losses once the onshore market reopens on Feb. 19 unless authorities offer reassurance that further support will ensue. The rescue steps taken so far — from state fund purchases to restrictions on short selling — have been more of band-aid measures than fundamental fixes to economic woes, traders say.

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“Market sentiment has improved slightly, but the sustainability relies more on improvements in economic activities and corporate earnings,”said Fanwei Zeng, an investment analyst at GAM Investments in Hong Kong.

Policy support rushed in just before traders headed home to reunite with family — with even the securities regulator chief replaced — a sign that authorities saw an urgency to stop the rout and prevent the gloom from spreading.

The moves have worked, to some extent. The CSI 300 capped its best week since late 2022, thanks largely to a 3.5% surge on Tuesday. Small-cap equities — which have led the selloff in the new year — bounced back more strongly, with the CSI 1000 Index advancing 9% in its biggest weekly jump since 2020. Overall, the Chinese market added more than $450 billion in value.

Many investors say that the gains onshore have partly been driven by state-fund purchases and short squeezes, rather than a return of real money. Margin lending curbs forced short sellers to close out bearish positions in small-cap exchange-traded funds, according to Bloomberg calculations.

Put options on the Hang Seng China Enterprises gauge accounted for about 40% of the average volume over the past five days, which show a lingering bearish mood.

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“Sentiment has only modestly improved given all the news that has come out but I suspect that this was more about short covering and not necessarily a change in views of the equity markets,” said Ken Wong, an Asia equity portfolio strategist at Eastspring Investments Hong Kong Ltd. “We will need to see more policy announcements to help improve sentiment.”

There are few signs that China’s economy is getting back on track. Deflation is deepening, the real estate sector remains mired in a crisis and manufacturing activity remains in contraction. 

What’s needed, investors say, is a growth-first policy mindset with significant fiscal stimulus, but that’s unlikely as China has pivoted away to a so-called high-quality growth model and authorities have signaled they won’t lean on big debt-fueled stimulus.

There is “clearly scope” for more selling by foreigners ahead if sentiment remains weak, according to strategists at Nomura Holdings Inc. 

Looking ahead to when markets return from holidays, some see merit in taking a tactical position in Chinese stocks. Data released Friday showed credit growth surged to a record high in January as demand for financing improved.

Traders will look at announcements related to interest rates and bank lending coming up later this month. Any surprising strength or disappointment from holiday spending data will affect sectors such as travel and retailers.

“Now is a good time to be tactically positioned in Chinese equities as there could be double-digit returns shortly,” said David Chao, a strategist at Invesco Asset Management, adding that he expects more interest-rate cuts soon.

Still, with many global funds having turned neutral or underweight during the rout, winning back their money for the longer term will prove a tall order. Geopolitical headwinds may also keep investors on the sidelines as anti-China rhetoric may ramp up ahead of the US presidential election. 

“We characterize the market as a trading market, so do we need strategic asset allocation to China? We are less comfortable with that,” said Homin Lee, senior macro strategist at Lombard Odier. 

--With assistance from Charlotte Yang, Zhu Lin and Akshay Chinchalkar.

(Adds China’s market value change in sixth paragraph, January credit in 13th paragraph.)

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