Mainland share prices recovered some lost ground on Wednesday as low inflation data helped bolster market sentiment and recoup from Tuesday's losses, said capital market sources.

Investor confidence resurfaced on Wednesday after the National Bureau of Statistics said inflation remained at lower levels in China during November, and stoked hopes of further policy easing by the government to spur growth. Though the overall confidence level has improved, opportunities for profit taking are still limited due to the high volatility, [Company Incorporation USA]  the sources said.

The Shanghai Composite Index climbed 2.9 percent to 2,940 points on Wednesday, after plunging 5.4 percent on Tuesday. The Industrial and Commercial Bank of China and China Construction Bank, the nation's two biggest lenders, rose by 2.3 percent and 2.17 percent, respectively. Environmental protection enterprises, publishing and media companies, construction firms and energy providers also led the rally.

Trading volumes in the Shanghai bourse amounted to 534.9 billion yuan ($86.9 billion), 46 percent above the 30-day average as 10-day volatility reached the highest levels since September 2009, according to Bloomberg data.

Hong Hao, chief strategist with BOCOM International Holdings Co in Hong Kong, said he believes that there is still enough room for growth in the Shanghai Composite Index, given the loose liquidity environment and rising investor interest. "But making money is becoming more and more difficult," he said.

The bullish A-share market, which posted its strongest growth in five years recently, is encouraging more small investors to reallocate their household assets, especially as the domestic property market is losing its sheen, said sources.

Many investors are withdrawing their bank deposits, redeeming their wealth management products, or simply borrowing from brokerages to dabble in the capital market. "It is the hottest game in town now," the sources said.

The balance of outstanding margin loans has risen more than two-thirds since the beginning of September to 575 billion yuan by the end of last week, according to a report in the Financial Times. Analysts said the growth in leveraged financing for small shareholders will exacerbate any correction, thus magnifying the risks in the equity market.

"Our research on fundamentals seems useless nowadays. The prices change so fast. The market can give high yield with high risks," said an unnamed private equity fund manager based in Shanghai, noting he did not make any money in the past week.

"Bank shares, [Hong Kong Company Formation & Registration]which were in the doldrums on Tuesday, have suddenly emerged as the market favorites. We cannot explain such a phenomenon with common logic," he said.

China Merchants Bank Co rebounded from Tuesday's 6.6 percent loss, jumping 8.3 percent, while Bank of Beijing Co added 5.4 percent.

Not all investors are that apprehensive about overall prospect. Bloomberg quoted a source with Guoyuan Securities as saying the People's Bank of China had injected as much as 400 billion yuan into the interbank market via the China Development Bank on Wednesday.

Though the development was not confirmed by the authority, analysts and economists aver that more monetary easing is on the cards and the much-anticipated reserve requirement ratio cut could happen soon after Thursday's conclusion to the Central Economic Work Conference. Reserve ratios have remained unchanged at 20 percent for major banks and 18 percent for smaller banks since May 2012.

Meanwhile, the lower-than-expected inflation data released on Wednesday is strengthening many investors' anticipation on further policy easing.

The Shanghai Composite has climbed 19 percent over the past month, the biggest gain among 93 global indexes, on speculation that the Chinese authorities will initiate more easing to avoid a sharp economic slowdown.

Analysts said the current rally has been mostly fueled by domestic capital from asset reallocations, with international investors playing a limited role. They point to the low traffic on the Shanghai-Hong Kong Stock Connect and said there have been no surges in any other investment channels including the Renminbi Qualified Foreign Institutional Investor program.

Meanwhile the China Securities Regulatory Commission cleared applications for 12 initial public offerings on Wednesday. [Hong Kong Company Formation|Hong Kong Company Registration] Six companies, including Spring Airlines, Zhejiang Xinao Textiles and Beijing GeoEnviron Engineering Technology, will go public at the Shanghai Stock Exchange, while the other six companies will seek listing on the Shenzhen bourse.