Hopes of extended rally rise on Party meet

Bullish investors are expecting the Fifth Plenum, a key meeting of the Chinese Communist Party to be held this week, will continue to fuel the stock rally, but some less optimistic traders worry that the current stock prices already factor in the likelihood of a policy catalyst, and might face rising selling pressure.

Mixed investor sentiments were in evidence in the volatile trading of the past week as the benchmark Shanghai Composite Index swung sharply between losses and gains.

"We expect the rally to continue but gaining easy profits and picking right stocks are getting increasingly difficult as market volatility is on the rise," said Zhang Yidong, a strategist at Industrial Securities Co.

The benchmark Shanghai Composite Index rebounded by 11 percent last month amid growing hesitation among investors.

Optimistic traders have increased stock holdings in the belief that the Fifth Plenum, which will lay out China's economic and social development blueprint for the next five years, will benefit companies with business operations that are aligned with the government's goal of pursuing an economic growth with higher quality and greater efficiency.

On Friday, the People's Bank of China, the central bank, cut interest rates and reduced the reserve requirement ratio for banks, a move some analysts said will further boost the stock market.

But cautious investors see rising risks in the valuations of stocks in certain industries like healthcare, information technology, environmental protection and new energy which have gained substantially over the past two months.

For instance, stock prices of companies associated with charging stations for electric cars have surged by more than 70 percent in less than one month.

The average price-to-earnings ratio of ChiNext, the country's startup index that tracks high-tech companies, has also exceeded 80 times, pointing to rising likelihood of a correction as investors engage in profit-taking.

While some analysts said that the stock rebound will likely experience resistance around the range between 3,400 and 3,500 points, a majority of them think the rally of the A-share market will continue at least until the next US Federal Reserve's interest rate meeting in December.

"The market has seen continued net capital inflow over the past week, meaning that new investors keep entering the market, which will help support the rally," said Li Shaojun, a strategist at Minsheng Securities Co.

Data from the China Securities Depository and Clearing Co Ltd showed that the number of new investors in the A-share market increased by 295,550 in the week from October 12 to 16, up by 185 percent week-on-week.