Bull charge sees Shanghai index reach 7-year high

A smartphone shows stock index, April 7, 2015. [Asianewsphoto bY Long Wei]

China's benchmark stock index reached its highest level in seven years on Tuesday, with the market frenzy showing no signs of cooling.

But some observers are wondering how long the liquidity-driven bull run can last, as economic data for the first quarter that is due to be released soon could paint a darker-than-anticipated prospect for the economy.

The Shanghai Composite Index rose by 2.52 percent on Tuesday to close at 3,961.38 points, just below the 4,000-point barrier, where many analysts feel the market will face strong resistance.

More than 140 stocks in Shanghai and Shenzhen rose by the 10 percent daily trading limit, with the combined trading volume on the two markets reaching a record high 1.4 trillion yuan ($226.7 billion).

The surge extended a rally in which the Shanghai index has risen by more than 60 percent in the past five months.

Analysts said liquidity is the main reason for the bull run, as investors have been with drawing money from the weak property market and other investment channels.

"Be fearful when others are greedy", a famed philosophy of United States investment guru Warren Buffett, appears to be irrelevant in the Chinese market as retail investors flock to open new accounts amid the rally.

The number of such accounts reached 1.6 million in the past week with trading value exceeding 6 trillion yuan, according to the China Securities Depository and Clearing Co.

Xiao Shijun, a strategist at Guodu Securities Co, wrote in a research note: "The recent market rise has largely been driven by inflows of liquidity as the fundamentals of a slowing economy have not changed. Monetary policy will remain loose to support growth and reduce deflation risks"

Liu Jipeng, an economist at China University of Political Science and Law, said the Chinese stock market appears to have always been policy-driven. A bear market is unlikely to return as long as policymakers come up with the right decisions.

But the market boom has reminded many observers of the bubble that burst when the Shanghai index shot through 6,000 points in 2007 before falling to 1,664 points a year later.

Some economists fear the upcoming economic data may trigger a market correction, as there is a high possibility of first-quarter GDP growth dropping below 7 percent.

Others fear that as the volatile and speculative nature of the Chinese market has not changed, there is a mounting risk of a liquidity bubble.

Excess valuations have emerged in Shenzhen, with the price-to-earnings ratio of some listed companies reaching as high as 90 times.

Analysts said another major risk is that a new wave of initial public offerings could drain market liquidity because the market watchdog is pushing a registration based plan for new share sales.