(Bloomberg) —

Chinese equities rebounded from an early Monday loss and sovereign bonds rallied, as investors weighed the odds for monetary policy easing against a regulatory crackdown that has roiled markets.

The benchmark CSI 300 Index erased a decline of 1%, before rising as much as 2% amid a rally in consumer shares, with Kweichow Moutai Co. gaining 3.4%. In Hong Kong, the Hang Seng Index also rebounded to gain 1%.

Trading remains volatile as investors try to price in the new reality of China’s regulatory moves, after last week’s steep declines triggered by a ban on swathes of the tutoring industry from making profits. Against that uncertainty, there are more signs of an economic slowdown, with Chinese sovereign bonds gaining on bets for policy easing.

While the government continued to tighten up rules on technology firms on Friday, there have been attempts to ring-fence its clampdown, with the securities regulator meeting banks to reassure them. The Politburo meeting on Friday also signaled targeted support for the economy.

“The Politburo meeting has emphasized stability again, so the downside for stocks won’t be too large,” said Chen Shi, fund manager at Shanghai Jade Stone Investment Management Co. Investors may also find comments from the Chinese securities regulator over the need for talks with its U.S. counterpart for Chinese IPOs reassuring, Chen said.

Read: China Seeks More Communication With U.S. on Overseas IPOs

In a flurry of action Friday, authorities summoned the country’s largest technology companies for a lecture on data security, vowed better oversight of overseas share listings and accused ride-hailing companies of stifling competition. The Hang Seng Tech Index slid as much as 1.6% on Monday before paring most of the losses. Tencent Holdings Ltd. fell as much as 4.1%.

“We expect a longer and more profound impact from the current regulatory cycle on China’s equity market valuations,” wrote Morgan Stanley analysts including Robin Xing in a research note. “There is a substantial degree of uncertainty over what this means both for future net income margins and revenue growth for the affected sectors and stocks.”

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Steel Stocks

Chinese steel stocks dropped, with some of them falling about 10% each, after a top industry body said there could be wider crude-steel output cuts as the government moves to reduce emissions in key sectors. Shares in Baoshan Iron & Steel Co., the sector’s bellwether by market value, slumped as much as 9.7%, the most since February 2020. Angang Steel Co. fell as much as 9.9% in mainland trading.

Read: China’s Top Steel Body Expects Wider Output Cuts as Demand Slows

Investors were also weighing data that showed easing economic activity in July, said Castor Pang, head of research at Core Pacific Yamaichi Intl (HK). Chinese leaders are expected to intensify policy support in the second half of the year to bolster economic growth, the China Daily said in a report.

A rally in China’s government bonds accelerated, as the yield on 10-year sovereign notes slid five basis points to 2.8%, the lowest since June 2020. Futures contracts on the 10-year government bonds extended last week’s rally, rising to a fresh one-year high.

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