Chinese stocks rallied today after the securities regulator banned shareholders with large stakes in listed firms from selling, in Beijing's most drastic step yet to stem a sell-off. 

As the daily official announcements aimed at propping up the equity market continued, state news agency Xinhua said police would investigate "malicious" short-selling of stocks.

The banking regulator also said it would allow lenders to roll over loans backed by stocks. 

China's benchmark Shanghai stock index closed 5.76% higher today. The Shanghai Composite index had fallen as much as 3.8% and rose up to 6.88% during the day - an overall range of more than 10%. 

The Shenzhen Composite Index, which tracks stocks on China's second exchange, ended up 3.76% higher.

Both indices had tumbled around 6-7% yesterday. 

Over 30% has been knocked off the value of Chinese shares since mid-June.

For some global investors the fear that China's market turmoil will destabilise the financial system is now a bigger risk than the crisis in Greece. 

The US has voiced worries the stock market crash could get in the way of Beijing's economic reform agenda. 

The plunge in China's previously booming stock markets, which had more than doubled in the year to mid-June, is a major headache for President Xi Jinping and China's top leaders, who are already grappling with slowing growth. 

Beijing, which had made handing a larger role to market forces a centrepiece of its economic reforms, has responded with a battery of measures to support the stock market. 

These measures included an interest rate cut, suspension of initial public offerings and enlisting brokerages to buy stocks, backed by cash from the central bank.

In the most draconian measure so far, the China Securities Regulatory Commission (CSRC) said on its website last night that holders of more than 5% of a company's stock would be barred from selling for the next six months. 

The CSRC, which warned earlier of "panic sentiment" gripping a market dominated by ordinary retail investors, said it would deal severely with any shareholders who violated the restriction. 

Meanwhile, major shareholders of top Chinese banks including ICBC  and companies including Sinopec, pledged to either maintain their holdings or increase their stakes in the companies. 
              
By yesterday, the Chinese market had begun to seize up, with around half the companies listed on Shanghai and Shenzhen exchanges opting to escape the rout by having their shares suspended. 

But China's stock market is still smaller than those of many developed countries relative to GDP, and equity financing only accounts for a small portion of companies' capital funding. 

"Even if the sell-off in Chinese mainland equities continues for a while, we doubt it will have a major adverse effect on China's economy," David Rees, economist at Capital Economics, wrote in a note. 

Nevertheless, commodities that are sensitive to the outlook for the world's second biggest economy have been hit, with copper prices touching a six-year low yesteray and iron ore tumbling to a 10-year low. 
              
China has orchestrated brokerages and fund managers to promise to buy billions of dollars' worth of stocks, helped by a state-backed margin finance company that the central bank pledged to provide sufficient liquidity. 

The securities regulator said today that the Securities Finance Corp would also use money to subscribe to mutual funds.