By Mao Lijun (China Daily)
Updated: 2007-09-17 09:45

The survey showed that more than 60 percent of individual investors preferred long-term, stable returns and are tolerant of losses up to 20 percent.

Risks and gains

However, the stock market's sharp gains are raising concerns about stock overvaluations.

Stocks in domestic markets are trading at more than 40 times listed companies' earnings per share on average, much more than developed markets overseas, such as 15 times in the United States and 20 times in Japan.

As stock prices and indexes surge, the A-share market bubble is accumulating quickly, increasing the risk of bigger fluctuations, experts say.

"China's equity market is starting to show signs of getting out of control," says Zuo Xiaolei, chief economist of China Galaxy Securities

Chinese regulators are expected to come up with certain policies to put the brakes on the surging stock market. They may impose administrative measures to curb investment demand, although no imminent monetary tightening measures are expected.

"The country's stock market is still in a policy-sensitive mood," Zhu Haitao, an analyst with Essence Securities Co, says.

The stock market is likely to be clouded by uncertainties in the short term, stemming from investors' concerns about further governmental action and possible monetary tightening measures, he says.

And they believed that a set of policy-related factors in recent days have already put pressure on stocks and is leading their prices to hike in the short term.

Such factors include the expected outflow of liquidity to overseas markets through QDII and direct investment, the issuance of corporate bonds and treasury bonds, the expectations of another interest rate hike, the banking regulator's action against irregularities in bank loans invested in the stock market and expansion pressure from red chips returning to the home market.

"Liquidity in the domestic stock market is expected to decrease in the second half because of the expected corporate bonds, return of the giant red-chip companies and outflow of liquidity to overseas markets," Galaxy Securities' Qin Xiaobing says.

The inflation figures for August released last Tuesday pushed the stock market down last week, as the highest figures in 11 years have raised the specter of a further rise in interest rates and other monetary tightening measures.

The National Bureau of Statistics said last Tuesday that the Consumer Price Index (CPI), a barometer of inflation, rose 6.5 percent year-on-year in August.

And an announcement last week of the sale of 200 billion yuan (US$26.6 billion)  in special treasury bonds to the public has also pushed stock the market down.

Economists say they saw a distinctive outflow of investment funds from the stock market last week.

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