The securities regulator, the China Securities Regulatory Commission, published draft rules on Friday that would for the first time limit the size of margin trading and short selling by law, capping the businesses at four times a brokerage's net capital.

Adding to investor concerns, an upcoming wave of initial public offerings is set to drain more capital this week. A total of 25 companies are expected to lock up 6.7 trillion yuan of subscription capital, according to Bloomberg analysts' consensus.

Bank of Jiangsu Co Ltd plans to launch an IPO in Shanghai. Analysts expected it could raise more than 40 billion yuan－even bigger than this week's 30 billion yuan mega IPO by Guotai Junan Securities Co.

"Investors are cautious now, yet not pessimistic," said Eric Wu, a private equity analyst based in Shanghai.

"The bull market needs a break, although it takes time to decide what kind of break will come. But I do not think the ceiling has been reached. It seems the regulators want a slow bull, rather than a bear," he said.

The Shanghai gauge has rallied more than 150 percent in the past 12 months, the most among global benchmark indexes.