Shanghai stocks may experience heavy volatility this week, with the market trend hinging on whether blue-chips can regain momentum and remain unaffected by the global stock stumble.

Most industry analysts said they don't believe a further deep decline is likely as liquidity is ample and institutional investors are set to take advantage of market lows to build positions.

The Shanghai Composite Index, which tracks yuan-backed A shares and US-dollar B chips, eased 1.95 percent last week to close Friday at 4,656.57. It plummeted a combined 4.38 percent on Thursday and Friday amid a worldwide stock plunge.

Cumulative turnover in Shanghai-listed securities amounted to 692.4 billion yuan (US$91.6 billion) last week, compared with 800 billion yuan a week earlier. The barometer climbed as high as 4,916.31 on Wednesday before heading south.

"We saw profit taking as the global stock markets, especially the Hong Kong bourse, turned sour over the US subprime loan turmoil," said Liu Yu, an Orient Securities Co trader. "But the link is by no means direct, and the mainland won't suffer as big a loss as other Asian markets."

Many analysts said they are still upbeat about the market's long-term prospects, citing rosy corporate profits. They favor banking and real estate stocks amid a sustained economic expansion and a stronger yuan.

But they also noted that short-term performance may fluctuate as a result of uncertainties over the country's macroeconomic policies and how long this round of profit taking will last.

"The key point is whether the market believes last week's drop was enough to digest earlier gains," said Wu Zhiguo, a Guosen Securities Co analyst. "Anyway, a sudden big drop is not likely, and we'd like to see a rebound soon."

A string of sizzling economic indicators in July, including a 5.6 percent growth in consumer prices, stoked market jitters that the government would move in to mop up liquidity and tighten credit.

But the stock market may not be significantly affected by such austerity actions, some observers said. A total 200 billion yuan in fresh capital raised by mutual funds is expected to land on the market within the month, Beijing Shoufang Investment Consulting Co said in a note.

"When everyone expects tightening, a 0.27-percentage-point interest rate hike just won't hurt," said Zhang Ming, an Everbright Securities Co trader. "If the index continues to drop, say, to the 4,500 or 4,400 territory, bargain hunting will become widespread."