Is the party over? That's what Chinese investors seem to be asking as the stock market is beginning to settle down into a lull from weeks of jittery ride after the stamp-duty hike on May 30.

Economists, stock analysts and fund managers interviewed by China Daily over the past few days say the answer to the question is "yes" and "no". The experts say "yes" because they say the liquidity-driven rally that pushed up the index 2,949 points in less than 18 months is unlikely to maintain its momentum much longer. But again, even without the mad rush for shares, the party is far from over because liquidity remains plentiful and the underlying fundamentals are still strong.

The general consensus among the experts is that the Chinese stork market, goaded by the central government, is entering a period of consolidation when institutional, with some individual investors reviewing their portfolios to weed out the stocks that have too much of a risk/return factor.

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The daily trading pattern on the Shanghai Stock Exchange is already showing a flow of investments toward the big-cap stocks, especially banks. The increasingly strong demand for mutual funds is seen by stock analysts as a clear sign that more and more individual investors are keen to minimize the risks by investing in professionally managed products.

There is nothing to suggest that systemic risks exist in any significant degree. Despite a slight increase in investors' gearing in recent months, margin trade on the bourse has remained small. The market bounced back almost immediately in the four daily sessions after the index plunged more than 5 percent since the beginning of this year without showing any signs of liquidity stress. That is typical of a highly geared investment environment.

The real risks, analysts say, lie in what they think to be over-valuation of the market in general and various individual stocks. At current prices, the average stock market price to earnings ratio is about 40 times, compared to an average of 14 to 18 times for other Asian markets.

The huge price difference in domestically listed A-shares and Hong Kong-listed H-shares of the same mainland companies vividly demonstrate the excesses of the Chinese stock market. And not surprisingly both are entitled to the same rights.

In some cases, stock valuation on the mainland seems to have gone haywire. Even the most daring investor will have a tough time justifying the 1,159 multiple of Qingdao Jiante Biological Investment's shares listed on the Shenzhen Stock Exchange.

"Today's valuations are unsustainable," says Stephen Green, senior economist of Standard Chartered Bank in Shanghai. "It may take several years for this unsustainable situation (in the mainland stock market) to correct itself."

As more investors are going back to the basics, "the (Chinese) stock market is on way to gradually shift from liquidity-driven to earnings-driven mode," says Shen Minggao, Citigroup economist in Beijing. This trend tends to favor private enterprises that are seen as more profitable than the State-owned enterprises, which have continued to dominate the stock market.

But "private enterprises are expected to become very important for development of the Chinese equity market because more of them are going to be listed in the next five to 10 years", Shen says.

In fact, private enterprises' share in market capitalization is expected to rise from 40 percent to more than 50 percent in a few years time.

Fund managers, who have always focused on big-cap stocks, are still bullish about the future of the Chinese market. Till now, they have done well by any standard. The combined assets of Chinese mutual funds grew more than 10 percent from April to last month, says Lipper, which tracks the performance of mutual funds. In the 12 months to May, their combined assets rose 157 percent, not too far behind the 188 percent jump in the benchmark index.

The volatility of the stock market over the past few weeks has not caused any change in strategy, say the fund managers. "We remain confident about the future," says Chang Yongtao, deputy chief investment officer at SYWG BNP Paribas Asset Management, which is owned jointly by Shenyin & Wanguo Securities of China and BNP Paribas of France.

Chang and other fund managers say the Chinese stock market's bull run will continue to be driven by liquidity and the asset re-evaluation that could help boost the underlying value of many listed companies' shares.

He cautions about frequent ups and downs in stock market performance, and says his favorites are the blue chips in the banking, real estate and retail sectors because of their longer-term growth potential.

In the short-term though, the stock market is likely to be clouded by uncertainties stemming from investors' concern over possible monetary tightening measures and further government action to clamp down on excessive speculation.

"The stock market is still in a policy-sensitive mood," said a recent report of Citic Securities, one of the largest stockbroker firms in China. The recently released inflation figures have raised the specter of further rise in interest rate and other monetary tightening measures, it said.

In the past few weeks, economists have seen a distinct, though limited, outflow of investment funds from the stock market. Citigroup's Shen says some of the funds might have been diverted to the property market. Wang Qian, a JPMorgan economist agrees, saying a few investors might have spent part of their share profits on luxury goods.

Such an outflow is widely considered by stock analysts as temporary. Money will, however, return to the stock market, they say, because the expected increase in corporate profits this year will make risk/return factor look more palatable to investors.

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