How long will the stock rally last?

Under such circumstances, "it is hard to understate the importance of a healthy stock market to the economy in general and the corporate sector in particular," he said.

But even the most optimistic analyst is asking how long the rally is going to last. As one investor mused in his blog: Are we really seeing the return of a bull market or is it just a mirage?

To answer this question, it is important to ascertain if the Chinese stock market is as undervalued as some analysts have suggested. It was a lot easier to answer this in November last year when it was made known that some foreign institutional investors had been quietly rebuilding their portfolios of mainland stocks. Apparently, these savvy investors were convinced that stocks of some major Chinese companies were selling at bargain-basement prices. At that time, the average market price to earnings ratio was 10.7 times. Now, the ratio has climbed to 12.57 times.

The news of their purchases has been widely credited with helping to launch the latest rally. But foreign investors' enthusiasm is nothing more than a psychological boost because the inflow of overseas investment under the Qualified Foreign Institutional Investor program has remained small relative to the size of the market. Domestic investors must decide if there is still life left in the process of stock revaluation.

That decision will depend almost entirely on the earnings potential of the publicly traded companies. Only when investors are convinced that the major publicly listed companies can maintain growth in quality income rather than acquiring new assets to boost revenue will they believe that a market revaluation is justified.

(China Daily 01/28/2013 page8)