China shares rebounded sharply late Friday morning, lifting Hong Kong markets with a surprising surge that had traders speculating on whether the root might be government support or a trading error.
The Shanghai Stock Exchange said in a statement after trading stopped for the midday break that it is investigating the spike, while adding that the markets were "operating normally."
At midday, the CSI300 of the leading Shanghai and Shenzhen A-share listings, on which futures contracts are based, went into the midday trading break up 3.6 percent at 2,406 points after being down by as much as 1.1 percent.
The Shanghai Composite Index was up 3.2 percent in the heaviest midday volumes this year and, at one point, had risen 5.6 percent. The Hang Seng Index was up 0.5 percent, while the China Enterprises Index climbed 1.6 percent.
"A lot of talk is swirling in the market, among which is one (theory) that the government hopes to keep the market stable for now," said Zhang Qi, senior analyst at Haitong Securities in Shanghai.
Financials led index gains.
Mid-sized lenders China Minsheng Bank and Industrial Bank each soared more than 8 percent in Shanghai, and Ping An Bank jumped by the maximum 10 percent limit in Shenzhen.
China Merchants Bank reversed early losses after it was given the go-ahead to raise funds in a new share issue. The shares climbed 5.6 percent in Shanghai and 2.1 percent in Hong Kong.
A sales trader from a major Chinese brokerage said there is talk of an announcement after market close about a plan to convert stakes in large cap counters held by the Chinese government into preferred stock, taking these shares off the market.
Large cap counters such as PetroChina, Industrial and Commercial Bank of China (ICBC) <601398.SS. and Agricultural Bank of China (AgBank) all briefly jumped by the maximum 10 percent limit before paring gains.
"Part of the volatility today is down to CSI300 futures settlement for August contracts after market close, but there is a lot of talk about a possible trading error," said Cao Xuefeng, a Chengdu-based analyst with Huaxi Securities.
The sudden surge in the last 30 minutes of the morning session for mainland exchanges caused heavy losses in programmed trading in short positions in the stock index futures market, traders said.
"That appears a warning from the authorities for those who dare to short aggressively in China's stock market," said a trader in Shanghai.