Chinese shares rebounded on Wednesday after a slump on Tuesday, with market sentiment buoyed by stocks favored by mutual funds.

Market observers believe the buying craze will continue in the next few days with bargain hunters and speculators on the prowl.

Analysts with Shenyin Wanguo Securities said retail investors are playing a bigger and bigger role on A-share markets. With an unending stream of individual investors entering the markets, the major index is likely to flirt with the 4,400-point barrier by the end of the month.

On Wednesday, all three major equity indices for China's two bourses closed higher, with gainers an overwhelming majority.

However, combined turnover dropped slightly to 262 billion yuan (34 billion U.S. dollars).

The benchmark Shanghai Composite Index ended Wednesday's trading at 3,986.04 points, up 86.86 points, or 2.23 percent, from the previous close on a daily transaction volume of 174.5 billion yuan (22.7 billion U.S. dollars).

The key stock index, which covers both yuan-denominated A-shares and foreign-currency-denominated B-shares, peaked at 3,987.41 points and bottomed at 3,845.23 points.

The Component Index on the Shenzhen Stock Exchange rose 267.81 points, or 2.35 percent, to conclude the trading day at 11,682.35 points on turnover of 87.7 billion yuan (11.4 billion U.S. dollars).

The Shanghai stock exchange recorded 756 gainers and 63 losers with 73 shares unchanged, while the Shenzhen bourse saw 476 gainers and 81 losers with 108 shares unchanged.

Shares in favor with mutual funds chalked up the most eye-catching performances, said analysts with Guangdong Kede.

Wuliangye, a leading liquor producer, rose 8.14 percent to 26.17 yuan, Tianjin Port went up 9.99 percent to 21.25 yuan, and Gehua CATV Network, up 8.52 percent to 24.07 yuan.

On Wednesday, the Hushen 300 Index, which tracks 300 companies on the Shanghai and Shenzhen stock exchanges, closed at 3,700.29 points, up 95.65 points, or 2.65 percent, from the previous close.