The multi-pronged intervention being imposed on China's fragile stock market will risk creating a moral hazard for investors, says JP Morgan.

The central bank and regulators have launched an array of bazookas to defend the market, with brokerages already having pledged to not sell shares until the Shanghai market has reached 4,500 points (the Shanghai composite index is currently hovering around the 3,775 level).

This level of intervention and overt influence on the market is making foreign observers uneasy, particularly on the wider implication for future bail-outs.

“The problem is that everyone knows your hand, so fine, whenever the market corrects 25%, the government is going to come up and bail you out, but that is extremely dangerous,” said Tai Hui, chief Asia market strategist for JP Morgan. “That, to me, is the moral hazard issue.”

On Monday, the Shanghai market opened up 7.8%, on weekend news that the central bank would support China Securities Finance, a state owned entity providing funding for brokers. It fell as low as 0.9% during intra-day trading, before recovering 2.41% at market close.

A note published on Saturday by the China Securities Regulatory Commission also noted that China’s 21 largest brokers will be pooling in Rmb120 billion to buy into stocks and will not be allowed to sell until the Shanghai composite index reaches 4,500 points. Further IPOs in the Shanghai market, which analysts say have been sucking up liquidity, have also been suspended.

Despite questions over moral hazard, Hui was cautious on calling the mainland Chinese market a bubble, with current 10 year p/e ratios standing at 16.8, which is well below the 10 year range that at its highest stood at 41.7 in 2009.

Nonetheless, Northern Trust’s chief economist Carl Tannenbaum suggested that some of the policies being launched by the Chinese government to reverse the sell-off “have had some air of desperation”.

“The current situation bears some similarities with the 2007-2008 Shanghai market bust, when the market fell by more than 65%. That blow was partly cushioned by the massive stimulus package Beijing introduced to combat the effects of the Global Financial Crisis. However, investor confidence still took years to recover. Some additional stimulus may be needed this time around if markets do not stabilize,” Tannenbaum continued.

Meanwhile, the Bank of America Merrill Lynch (BAML) suggested that the government might have taken the first step in letting the central bank become the buyer of last resort, through providing liquidity to brokers and indirectly supporting the market.

While the A-share market may rebound in the coming days, especially large cap names being propped by China's sovereign funds, BAML suggests investors sell into the rally.

“We assess that there is still a fairly high chance that market may fall sharply again at certain point over the next few months, unless the PBOC makes an open-ended commitment to support the market,” said strategist David Cui, noting that the Shanghai market ex-banks are trading at 31x trailing 12-month earnings.

Brokerage stocks could also be in under greater selling pressure as they will have to take many over-valued stocks on their books which may damage their balance sheets down the road, said Cui.