CHINA'S yuan-denominated A-share market is expected to continue a weak run in the second half of this year due to deteriorating profitability of listing companies and policy uncertainties, according to an investment report.

The combined profit of companies listed on the Shanghai and Shenzhen stock exchanges is expected to rise 8.7 percent from a year earlier in 2013, down from a previous projection of 11.5 percent, the UBS Investment Research said in a report.

UBS expected the CSI 300 Index, a gauge tracking the top 300 companies traded on the Shanghai and Shenzhen bourses, to hover around 2,300 points in the second half after plunging nearly 13 percent between January and June.

Earnings of non-financial companies are expected to grow 6.8 percent year on year while earnings of financial firms are estimated to increase by 10.3 percent, the report said.

"Profitability of listing firms is plagued by the mounting deflation risk as indicated by the falling Producer Price Index that has been declining for 16 consecutive months," said Chen Li, head of China equity strategy at UBS.

"Corporate profitability was also hit by the liquidity crunch last month, the impact of which equals to an increase of 30-50 basis points in the benchmark interest rate or a 100-basis-point rise in requirement reserve ratio," Li added.

Last month, China's money market suffered the worst liquidity crisis in years, with the seven-day repurchase rate, a gauge of liquidity strain among banks, hiked to a decade-high of 11 percent. Now the gauge is floating around 3.5-4.5 percent, up from the range of 2.8-3.2 percent in the first half of the year.

Meanwhile, a prevailing cautious sentiment depresses the market as investors are taking a wait-and-see stance due to uncertainties about policies including those regarding money market, foreign exchange rate, and economic growth, the UBS report said.