China's stock market bull run might continue, risks remain

After a booming year, the bull run of China's stock market is expected to continue, boosted by economic and financial reforms in addition to easing measures.

China's stock market has soared over the past year, even as the world's second largest economy has been witnessing a slowdown in growth.

From May of 2014 up to the latest trading day on April 30, the Shanghai and Shenzhen shares surged 119 percent and 103 percent respectively.

In just a year,the average price-to-earning (PE) ratios in the two bourses have jumped to 22.6 and 49.7 from 10.6 and 24. The aggregate market capitalization of the two markets climbed by 138 percent to the current 56 trillion yuan (about 9 trillion U.S. dollars).

The world-beating performance of China's stock market is no surprise and this round of bull run started when the central government, on May 9 of 2014, unveiled a blueprint for capital market reform aimed at boosting regulatory transparency and widening market access.

In a wide-ranging statement of policy principles, the State Council said it would develop a system for direct bond issue by local governments, streamline the approval process for initial public offerings (IPOs), and remove some restrictions on financial derivatives.

About six months later, the stock market got a fresh boost when a stock trading link was launched to allow investors in Shanghai and Hong Kong to trade on both bourses.

Rather of being directly linked to China's economic growth, the bull run is a result of multiple factors including ample funds, confidence and policies, Ni Zhengdong, founder of Beijing-based venture fund Zero2IPO Group, told Xinhua.

Since a sweeping economic reform agenda emerged in November of 2013, reforms of state-owned enterprises and the financial sector have been speeded up, and the Belt and Road Initiative and regional integration plans have boosted market morale.

Popular entrepreneurship and innovation, adopted as the new engine for the "new normal" economy, and "Internet Plus" action plan unveiled by Premier Li Keqiang during the parliamentary sessions in March have also boosted investors' confidence in the economy which is undergoing transformation and restructuring, Ni said.

All these factors have brought "enormous positive energy" to the stock market, he said.

Guan Qingyou, executive director of Minsheng Securities research institute, attributed the bull run to re-allocation of personal assets amid falling housing prices, re-allocation of banks' assets amid contracting official credit, and monetary easing amid downward pressure on the economy.

Up till now, the three driving forces for the bull market have shown some "quantitative changes," but no "qualitative changes", Guan said.

The party is set to continue until we can see "continuous improvement in real estate sales, higher-than-30-percent growth in infrastructure building investment, sustained rebounds in commodities prices, producer price index (PPI) turning positive from negative, and rising trend of consumer price index (CPI)," Guan added.

Trading has been so active that the combined turnover for the Shanghai and Shenzhen bourses hit a record 1.8 trillion yuan on April 20, with the former reaching an all time high of 1.1476 trillion yuan: The display at the bourse was not designed to even display a numerical value that high.

Chinese new stock accounts rose by 433 percent year on year in the first quarter this year to reach almost eight million. Last week, a record-high 4.13 million Chinese applied for new accounts. Now there are about 200 million A shares accounts in the country.

Analysts also warned that risks still remain as a sustainable bull market must be built on a strong real economy, and the securities regulator said a slower and steady market rally would benefit everyone.

The China Securities Regulatory Commission put a notice on its website last week to warn investors to be cautious with trading, and several security traders have adjusted their marginal buying policies to avoid possible risks.

For individual investors in China, the stock market is clearly not plain sailing. Shanghai shares had been sinking for about five years before the start of this round of bull market late in 2014.

The Shanghai reached its all-time high in October 2007 at 6124, compared to the current 4441. Many investors who bought stocks at that time still need to wait a long time to make a profit.

Taking PetroChina as an example, share price of the oil refinery giant closed at 13.39 yuan per share last week, compared to nearly 50 yuan per share in October 2007. New investors might need to keep this in mind as they swarm to the party.