JUST RELAX ABOUT CHINA'S STOCK MARKETS - FT.com

Two mornings every week, a friend of mine goes to a park in central Shanghai to practise T'ai-chi, the Chinese exercise regime sometimes known as meditation in motion. The group of mostly retired Chinese is led by an elderly gentleman who mixes strict punctuality with a certain eastern mysticism.

My friend was there on a cold February morning the day after the local stock exchange had fallen 9 per cent, spooking the rest of the world's markets. The group was halfway through their hour-long sequence of movements when the leader cut them abruptly short. "I have to leave early to get to my stockbrokers before the market opens," he announced. "Because today is a buying opportunity."

Everyone who lives in a Chinese city at the moment has a story to tell about the stock market craze and most have a similar theme: fascination with the sheer dynamism of the boom and fear at the occasional recklessness.

Having watched share prices quadruple in two years, more than 100,000 Chinese have been opening trading accounts every day in recent weeks as a new generation of middle-class Chinese has gained a taste for playing the market.

But in a nation where the urge to gamble is never far below the surface, the stock market has sometimes come to resemble a casino. People have taken out loans to speculate, while a few individuals have even pawned their houses to buy shares. The education ministry last week warned university students not to be distracted by investing. Eccentric investment theories abound: some are looking for shares with a price less than the cost of a kilo of pork, on the grounds that such a company must be a very good bargain indeed.

The 6.5 per cent drop in the market yesterday is a grim reminder of how this story could end: a collapse in the Shanghai market with the people who came in at the end of the party picking up the tab. So irrational is the exuberance in China that even Alan Greenspan, former chairman of the US Federal Reserve, is worried.

But will the damage stop there? In the early stages of the market boom, gung-ho Chinese speculators were considered a mild curiosity. Yet as the rally has gathered pace over the past month or so, some international investors have begun to fear the potential global fallout from Shanghai's excesses. They have started to ask what would be the impact from a crash not just on the Chinese economy but also on global iron ore consumption, Latin American trade surpluses and Treasury bill purchases.

The answer is, well, pretty much nothing at all. If the mainland market were to drop by a further 20-30 per cent, the Chinese economy would barely miss a beat.

For a start, there would be no domino effect of forced selling in one market pulling down others. Given the wall of capital controls that Beijing maintains for its currency, the mainland stock market is a parallel universe, detached in any real sense from other markets, with little money coming in to the country to invest in shares and little going out. Foreign investors have only a very modest exposure to mainland equities. Indeed, capital controls explain why share prices in Shanghai are so high: people have few other places to put their money.

Despite the recent boom, the stock market is still a relatively small part of the economy, even by the standards of emerging Asia. The massive investment surge in China has been financed largely from corporate profits, not from the capital markets, and would carry on at a relentless pace.

It is possible that consumption growth might be modestly held back, but retail spending was already surging before the market rally began. Most of the new funds have come from savings, not credit, and the Chinese still have $2,000bn in bank accounts to fall back on. Consumers can withstand a large correction.

The Shanghai market still has the power to scare the world – we saw that in February. In markets, if enough people think something is important then it is important, whatever the underlying logic. If global equities are overvalued and due a correction, investors do not need a good reason to start selling, just a popular one.

But for investors comfortable that strong global growth underpins the rise in share prices around the world, a collapse in Shanghai is an occasion to hold one's nerve and remain calm. Maybe even try some T'ai-chi.

The writer is the FT's Shanghai correspondent

Chinese Shares Slump After Stock Trading Tax Hike

China increased its tax on share trades, leading to a 6.5 percent drop in its main stock index and jitters throughout Asian markets. Joseph Popiolkowski reports from Hong Kong.

A stock investor naps in front of the stock price monitor at a securities company in Shanghai, 30 May 2007

The benchmark Shanghai Composite Index fell 281 points Wednesday after China's decision to triple its tax on share trades.

Late Tuesday, China's Ministry of Finance announced the increase from 0.1 percent to 0.3 percent.

It is the government's latest effort to cool the market, which has more than doubled over the past 12 months.

The effect was felt region-wide as Hong Kong's Hang Seng share index closed down nearly one percent Wednesday. Markets in Japan and Singapore also declined.

Wednesday's drop comes after weeks of warnings by economists and market experts - including former U.S. Federal Reserve chairman Alan Greenspan - that Chinese stocks were due for a fall.

One expert called the market's decline a "healthy correction". However, Enzio von Pfeil, who heads the research firm Commercial Economics Asia in Hong Kong, says the increased tax is an attempt to stabilize the market before China's Communist Party Congress late this year.

"What we've seen today is a bump on the way up, in other words it's people going up an escalator not down an escalator for the very simple reason that the central government in Beijing wants to continue very, very strong growth. It wants to show its very best possible face that it can," he said.

Enzio von Pfeil downplayed its effect on regional markets and says after an initial downturn they will rebound.

"There will be a short, sharp move down Wednesday but in those economies where the economic time is still particularly good - for instance in Hong Kong and Korea, which is what we're telling our clients - that is where I think you will find a lot of buying coming back in. So the idea here is to buy on weakness and that's what I think will happen tomorrow," he said.

In recent weeks, China also increased its interest rates and bank reserve ratios, which, like Wednesday's stamp tax increase, von Pfeil says were part of a series of attempts to rein in the market. However, he says, Beijing is reluctant to pull the reins too hard and risk slowing the economy too far and causing a rise in unemployment.

Chinese investors may be not too crazy after all

The Huixin Dongjie office of Xiangcai Securities in Beijing was packed Wednesday. Investors of various ages stared at the exchange board as the numbers flickered constantly.

While the place was busy, with people making transactions, there weren't many long lines. It was a different picture of the red-hot stock market some media had reported earlier.

A woman surnamed Wang sold all her stocks days ago and is now waiting for a correction in China's runaway stock market.

"The market has reached its peak and is certain to fall," said the new investor in her thirties. She had beginner's luck, making a 10,000-yuan profit out of 30,000 yuan in two months. "I will start buying stocks again after a major fall."

Another investor who calls himself Old Jiang, 60, opened a share-trading account in April and he put 20,000 yuan, a small part of his savings, into the market.

"It's just for fun and it helps me kill the time," said the retiree who said he did not care much about the gains.

"If my money increases, it's good, as I will have more money to buy meat," the former engineer told chinadaily.com.cn. "But if I lose the money it's also ok, as it will not affect my everyday life greatly. "

What Wang and Yang are doing presents a different picture from that painted by some domestic media. Reports often recounted irrational Chinese investors eagerly jumping into the stock market, expecting quick money and unaware of the risks.

There are also frequent stories about a senior betting all of his or her hard-earned savings on the stocks, or about a man putting all his possessions up as collateral to get a loan for stocks.

But in fact, Wang is among millions of investors who are not so optimistic about the future development in the market.

Statistics from the Shenzhen Stock Exchange showed, by the end of March, more than 3.4 million investors in the bourse have sold all the stocks in their portfolios, or made no transactions after opening new accounts, according to earlier reports.

Grandpa Yu, 66, was one of them. "The market will definitely fall," he said confidently. "When the flood of new money slows down or stops, the market will lack support. It is the rule of stock market."

Most of the investors around him chose to hold cash when the Shanghai Composite Index surpassed 3,500 points in early April. The index broke through 4,100 Tuesday, extending this year's gains to more than 53 percent on top of a 130 rally in 2006.

A 50-year-old woman surnamed Cao hasn't pulled out of the market yet. She has raked in 100,000 yuan from her investment since the start of last year, and continued to buy stocks, mostly those below 20 yuan each. But she is trading cautiously even while believing the bull market will continue.

"I have pulled out my initial investment and now just use the gains for further transactions," she told chinadaily.com.cn at the packed Huixin Dongjie office of Xiangcai Securities.

A veteran investor surnamed Liu agreed with Cao on the long-term trend, but he was worried about potential cooling measures by the government, especially an increase in the stamp tax.

To his relief, the Ministry of Finance and State Administration of Taxation said Tuesday that they have not heard of any plan in this regard.

Starting his stock investment more than 10 years ago, Liu said as far as he knows most of the novices are cautious. "They will usually put in just 20,000-30,000 yuan at first," he said. "But if they see the gains are not bad, they will buy more stocks."

Liu disagrees with some reports that say many new entrants to the market know nothing about stocks and just follow rumors. "As far as I know, they will read some books and newspapers on investment, or watch related TV programs to get some idea before making transactions," said Liu.

Novice investor Fang echoed Liu's point. Fang did intensive rsearch before entering the market in April and continues to do so every day.

Fang mirrors a change brought about by the stock fever: the Chinese are paying more attention to the country's economic development and governmental policies, according to a report by China News Service.

"I only read international news before," said a post-graduate student surnamed Xin at the Chinese Academy of Science. "But after I started to buy stocks, I got more and more interested in economic news, especially news on interest rate hikes or renminbi appreciation."

Xin has learned to study the fundamentals of listed firms and make an educated decision before making actual purchases. "In general, my investment has become more steady and conservative," said Xin.

There are signs the market is cooling as evidenced by a slowdown in the opening of new A-share accounts.

From May 15-22, an average of 266,000 accounts were opened each day compared with 342,000 in the previous week, according to the China Securities Depository and Clearing Corporation. The fall came after a major market correction on May 15 when the Shanghai Composite Index fell 3.64 percent.

"We open some 30 accounts each day after the pullback, down from 40-50 after the Labor Day holiday," a clerk at the Huixin Dongjie office of Xiangcai Securities told chinadaily.com.cn.

China stocks fall after risk warning

Chinese stocks fell Thursday in heavy trade after regulators sent out the second warning on stock investment risks in less than two weeks.

The Shanghai Composite Index lost 0.54 percent to close at 4,131.13 points after touching an all-time high of 4,208 in the morning trading. The Shenzhen Composite Index dipped 0.72 percent to 1,215.16.

The Shanghai and Shenzhen 300 Index of major companies was down 0.49 percent to 3,919.75. The index for B-shares in Shanghai nosedived 7.98 percent to 297.56.

The decline came after the China Securities Regulatory Commission (CSRC) sent out a notice on Wednesday, demanding securities firms educate individual investors on risks. The CSRC issued a similar notice on May 11.

The latest notice ordered the brokerage firms to set a budget for investor education and decide on the education material they should give potential investors. The announcement also called for the establishment of an investor corner in the firms' branches, focusing on risk alerts, securities laws and regulations, as well as basic knowledge.

Also on Wednesday, former US Federal Reserve Chairman Alan Greenspan said China's stock market was unsustainable and he expected a dramatic contraction at some point.

More than 600 stocks fell while 253 others rose in the Shanghai Stock Exchange. In Shenzhen, 438 were down as 175 went up.

Despite the fall, bank shares staged a strong performance. Industrial Bank rose 2.41 percent to close at 30.21 yuan per share, followed by China CITIC, which gained 1.21 percent to 10.86 yuan.

Bank of China edged up 0.86 percent to 5.88 yuan, while the Industrial and Commercial Bank of China rose 0.72 percent to 5.56 yuan.

Insurance shares were weak, with China Life dropping 1.69 percent to 38.98 yuan and Ping An Insurance of China shedding 2.79 percent to 62.42 yuan.

In the energy sector, Sinopec fell 1.35 percent to 12.45 yuan, as Shenergy Group was down 4.16 percent to 19.37 yuan.

Trading was heavy, with the volume hitting 257.2 billion yuan in Shanghai and turnover reaching 132.3 billion yuan in Shenzhen.

Global funds to be winners from China investment change

HONG KONG (Reuters) - Global fund houses will be long-term winners from China's decision to let banks invest client money in overseas stocks, offering a new channel for the international money managers to tap into more than $2 trillion in personal savings.

The change is especially good news for global money managers that haven't already set up domestic operations in China, since they can now partner directly with Chinese banks to sell foreign equity products to Chinese investors.

"This comes as a very pleasant surprise, I suspect, to those fund management companies that either hadn't set up or weren't planning to, but now suddenly they're in there with a chance," said Shiv Taneja, Singapore-based managing director with global asset management research firm Cerulli Associates.

Chinese regulators unveiled a plan on Friday to let banks pour client funds into stocks or structured products in overseas markets for the first time, starting with Hong Kong. The news has sent Chinese shares in Hong Kong <.HSCE> to record highs.

"It's a very positive opportunity," said Ajay Srinivasan, chief executive of UK insurer Prudential Plc's (PRU.L: Quote, Profile , Research) 29.2 billion pound Asian fund business, which includes a stake in a mainland joint venture.

"Actual mechanics are not fully available, but we expect more details in the coming weeks," he said.

The change, which could help ease upward pressure on both the yuan and China's soaring stock market, is an expansion of China's Qualified Domestic Institutional Investor (QDII.L: Quote, Profile , Research) scheme launched last year.

Some $15 billion worth of QDII quota has been allocated, but analysts estimate less than $1 billion has been used because initial offerings were confined to fixed-income, so already low yields were eroded by the yuan's appreciation.

Investors also preferred to invest in China's red hot domestic stock market, which rose 130 percent last year.

Executives with Schroders (SDR.L: Quote, Profile , Research), Amvescap (AVZ.L: Quote, Profile , Research), China Southern Fund Management Co., and the joint ventures of HSBC ( HSBA.L: Quote, Profile , Research)( 0005.HK: Quote, Profile , Research), Fortis ( FOR.BR: Quote, Profile , Research)( FOR.AS: Quote, Profile , Research), JPMorgan (JPM.N : Quote, Profile , Research), Deutsche Bank (DBKGn.DE : Quote, Profile , Research) and KBC (KBKBt.BR : Quote, Profile , Research) have all told Reuters they want to launch QDII products into China.

SECOND TIME LUCKY

Industry players are more optimistic about the next round of products, which they expect to be similar to a pilot fund recently launched by Bank of China (601988.SS: Quote, Profile , Research) (3988.HK: Quote , Profile , Research).

After killing its first unsuccessful QDII product earlier this year, the bank raised 793 million yuan with its new China Stable Growth Fund that invests partly in overseas funds managed by Fidelity and Credit Agricole ( CAGR.PA: Quote, Profile , Research).

"What we anticipate is that in the next several weeks (China) Construction Bank (0939.HK: Quote, Profile , Research), ICBC (1398.HK: Quote , Profile , Research) and Agricultural Bank of China will probably follow suit with a similar product," said Peter Alexander, head of Shanghai-based fund industry consultancy Z-Ben Advisors.

Neither Fidelity nor Credit Agricole has gone through the painstaking and sometimes costly process of setting up a joint venture in mainland China, though Credit Agricole hopes to launch one later this year.

Until now, joint ventures have been the primary way for international fund houses to access China's retail investors.

But the changes are also good news for the Sino-foreign joint ventures, as it suggests authorities may be close to letting them bring their international products to the mainland, said Joseph Ngai, an associate principal with consultants McKinsey & Co.

"It's not too far away. If you allow the banks to do it, the next thing is you allow the mutual funds to do it," Ngai said.

Ngai said this would also give international fund companies and advantage over purely domestic players, because they could tap the overseas products and resources of their foreign partners.

To be sure, the changes are not expected to trigger an immediate "wall of money" for international fund houses. Initial flows may be slow as banks and fund companies grapple with the new rules. A rising yuan and strong domestic market could also cool investor demand.

Z-Ben's Alexander noted that given the wide reach and limited number of Chinese banks, international fund houses may need to be generous when negotiating fee sharing.

But he is optimistic for the longer term, predicting that a total issued QDII quota of US$95 billion by the end of 2009, when he also expects issued quota will equal invested quota.

"We are rather confident that the scheme will have become an integral part of China's investment management industry by 2009. Getting from here to there may, however, require a great deal of patience," he wrote in a recent report.

Can China Defuse Its Stock Market?

Index futures might create stability, but Beijing fears they could prick the bubble

Slide Show >>

Here's a surefire recipe for a stock bubble: Take blistering economic growth, throw in strong corporate earnings, add artificially low interest rates, and stir in a dash of inflation. Then rule out any viable investment opportunities besides equities, and you'll quickly find yourself moving past "pop" and into "kaboom" territory. That pretty much sums up the situation in China, where 250,000 new retail investors are crowding into the market every day. Together, the mainland's 70 million traders have pushed Shanghai's benchmark index up nearly 50% since the beginning of the year, following a 130% gain in 2006.

Beijing is terrified of what might happen when that bubble bursts. Many investors are pensioners and other jobless people who have plowed their savings—and sometimes even funds raised by mortgaging their homes—into stocks. If the market tanks, Beijing fears, it could dent consumer confidence and send disgruntled investors out into the streets. The rest of the world, meanwhile, is worried that any collapse would quickly spread to exchanges across the globe.

Financial experts say there's a way China could create greater stability: stock index futures. Sophisticated traders in developed markets use these wagers on the direction of shares to cushion themselves against massive losses if the market falls. Futures also theoretically dampen volatility as more pricing information is factored into investment decisions. China currently has no equity derivatives such as stock options and futures, and short-selling stocks—betting that the price will go down—is banned. That means people can make money only in a bull market, and have no choice but to cut their losses when prices tumble. And if everyone rushes for the exits, shares go into a tailspin.

DELAYS AND DOUBTS 
Beijing understands this and had originally hoped to introduce index futures this spring. Now the launch has been delayed until at least September. The reason: While futures might eventually create more stability, in the short term investors who don't fully understand the concept might get spooked and start selling their shares. "There is a commonly held belief, which is wrong, that the introduction of futures causes underlying stocks to fall," says Fraser Howie, who manages the China portfolio for CLSA Asia-Pacific Markets. "The authorities are concerned about anything that could pop the bubble."

There's a second fear. To work well, futures markets require transparency, ample safeguards against insider trading, and a sophisticated investor base, all of which are glaringly absent in China. While futures can smooth out the bumps in the market, they also let traders leverage their bets, increasing their potential profits—but also the risk of bigger losses if they get it wrong. "Futures won't achieve what the government is trying to do," says Carl Walter, managing director at JPMorgan in Beijing. "They may even cause more volatility."

Previous Chinese experiments with financial futures haven't been particularly auspicious. In the early 1990s, China introduced bond futures but abruptly halted trading in 1995 after a securities company, acting on bogus insider information, lost billions of dollars on futures, driving itself into bankruptcy and landing its CEO in jail. Since then, trading in most derivatives has been banned, though futures contracts for commodities such as copper, soybeans, and corn are traded on three exchanges.

Lately, the new China Financial Futures Exchange in Shanghai has been experimenting with derivatives again. Last fall the exchange began simulated trading of futures based on an index of 300 companies and has been conducting education seminars around China. While nearly 100,000 people have taken part so far, experts say their behavior doesn't necessarily indicate how investors might actually use futures. In tests, traders "don't seriously look at the profit and loss," says John P. Davidson III, corporate development chief at the Chicago Mercantile Exchange. Putting real money on the line, though, might just be the recipe for reining in China's wild markets.

Risk-addicted Chinese take a punt on the bourse

There were few signs of frayed nerves among the day traders crowded into the small, airless brokerage on the fifth floor of Jingtai Towers in central Beijing on Friday.

"The index is going to double!" gushed one man, who identified himself only as Mr Wang, brushing off the day's small sell-off. "This is good for the country and good for the people."

Some angst would be forgivable. The market has already risen by about 300 per cent in less than two years. The growth in turnover has been even more remarkable. Last Wednesday the value of all shares traded in China outstripped the rest of Asia combined, including Japan and Australia, for the first time ever.

Successive senior officials have issued public warnings of a bubble in stocks. Once, this would have been enough to trigger a sharp sell-off, but investors now enthusiastically ignore entreaties. The Chinese have been opening new stock trading accounts at the rate of about a million a week since the start of the year.

Momentum investing, when traders follow and then accelerate an existing trend, can happen anywhere. But there is no momentum in the world to match ordinary Chinese when they spot a chance, en masse, to make some money.

The most obvious explanation for this is that people have nothing better to do with their money, which many Chinese have a lot of these days. Leaving it in the bank offers them negative returns, after inflation and tax. The property market is expensive and frothy. Unless they're rich enough to evade the law, they are not allowed to take their money offshore.

More important, share trading offers ordinary Chinese the chance to gamble. The ruling Communists banned gambling as a "social evil" after taking power in 1949, but the stock frenzy shows that citizens have not lost their taste for it.

Lynn Pan, the author of many books on China, said a businessman friend had summed up the phenomenon for her as: "The Chinese are addicted to risk."

Cultural fatalism and superstition have long fed the propensity for gambling. But Ms Pan also puts it down to the belief in the importance of luck in getting ahead in a country with a massive population and few clear rules.

In that respect, China is a classic "low trust" society, with a thin layer of widely trusted intermediary institutions and an only recently acquired reliance on property title and contracts. In such a social setting, said Ms Pan, "chance can play a very big part in your life".

Mr Wang and his group of friends, all laid-off workers who now spend their days trading stocks, exhibit a customary cynicism about their chances of beating the market - and the big end of town - in the end.

"This is gambling," quipped one man, with a chuckle. "With the Communist Party in charge, how can we ever win?"

INVESTMENT FROM CHINA

Is a wall of Chinese money about to hit global markets? On Friday regulators prised open the window and gave mainland investors their first opportunity to invest in foreign equities – raising the prospect that China will start decanting $4,400bn of bank savings into overseas markets.

That is some way off. Beijing has lifted restrictions on investing up to half the existing quotas for overseas investment – dubbed qualified domestic institutional investor, or QDII – in equities. That implies potential outflows of just $7bn-$9bn. Hong Kong's bourse, the obvious first port of call, can turn over more than that in a day. And even that amount may not be unleashed immediately. The attractions of, say, Hong Kong stocks pale when contrasted to the domestic market, up 48 per cent this year in local-currency terms.

Opportunities for meaningful arbitrage, too, are slim. The 40-odd stocks listed on both the domestic-currency A-share market and in Hong Kong trade on vastly differing multiples. China Life, for example, is 65 per cent more expensive in Shanghai. But the mechanics of QDII preclude stock selection; instead investors will have to buy funds or similar products sold by the banks. Given the inaugural role of these funds, the emphasis will be on conservatism and quality rather than exploiting valuation gaps.

Nonetheless, the move marks another milestone on the road to a fully convertible currency. It also demonstrates the extent of pressure on Beijing both to offset surging capital inflows and to cool the domestic stock market bubble. The stock market performance is almost wholly driven by captive liquidity, so broadening the investible universe would remove some of the froth. For now, however, the numbers are too small to have much impact on either front – or on overseas markets

Chinese Spurn Bank Savings in Favor of Booming Stock Market

Keen for a piece of China's red-hot stock market, people all over the country are withdrawing money from their bank accounts to invest in shares. Experts warn this could be a risky move. They say the market boom is a bubble waiting to burst, and that many retail investors could be hurt. Claudia Blume reports from VOA's Asia News Center in Hong Kong.

Chinese investors watch data shown on the board of a stock trading house in Shanghai, China, 28 Feb 2007

A new survey by China's central bank shows that just over half of the respondents regard bank deposits as their most important financial asset, the lowest level on record.

An all-time high of 30 percent - up from 19 percent a year earlier - believe it is better to invest in the stock market.

All over the country, people are rushing to banks to withdraw their money and buy stocks.

"Now that the stock market is booming, they are sort of catching the fever and think it's an easy way to make money," said Robert Broadfoot, who runs a political-risk consultancy in Hong Kong.

Chinese retail investors are opening new share trading accounts at a rate of more than 200,000 a day. The Shanghai and Shenzhen stock markets are reaching new heights because of all the new money pouring in. The market mania started last year, when the Shanghai Composite Index surged 130 percent in value.

The government has repeatedly warned investors of the risks of an overheating market.

Liang Zhou, a research manager in Shanghai for Lipper, a company that studies investment fund performances, says many new investors - people such as students, office workers and retirees - are willing to take risks. He says many have a gambling mentality and they had no experience with China's last stock market collapse, six years ago.

"New investors don't [didn't] suffer from the recession of the stock market, from the decrease of the stock market, so they are more emotion[al] even in such a red-hot market now," he said.

Broadfoot says the small investors bear most of the risk if the market collapses.

"The two major groups that we are really worrying of becoming over-exposed in a bubble market are, one, poor people that can't afford it and secondly, groups that maybe borrowed from the banks for purposes of investment," he said.

Broadfoot says some people who take loans to invest in the stock market tell their banks they need the money for other purposes. He says if the market collapses, there could be an increase of non-performing loans.

CHINESE INVESTORS IGNORE BUBBLE TALK TO OPEN NEW ACCOUNTS

Chinese retail investors are rushing to open new share-trading accounts at a faster rate than ever before, in spite of increasing signs of a resurgent bubble in the mainland market.

In the past week alone, more than 1m new accounts have been opened, taking the total for the past four months to in excess of 10m �C more than the previous four years combined.

The wave of new money has led the Shanghai and Shenzhen markets to consistently hit record highs, having bounced back from an 8.8 per cent correction on February 27, which many blamed for a global sell-off.

However, analysts warned that current price levels were unsustainable and the market could be approaching another correction.

"This is definitely a bubble in the making �C for the vast majority of stocks positive earnings growth has been priced in until 2009," said HSBC equities analyst Steven Sun. "At the height of the last stock bubble [in 2000-2001] we saw investors opening 2m accounts a month which is half the current rate."

"Any money getting into the market now is not smart money and is coming from the kind of people who can least afford to lose it," said Fraser Howie, author of a book on the Chinese stock markets. "That has to have the government worried about social stability."

The rush to join the Chinese stock frenzy comes after the market rose more than 130 per cent last year and a further 40 per cent so far this year. The benchmark Shanghai Composite Index rose 0.01 per cent yesterday to hit another record high.

Retail investors began returning to the stock market in large numbers last May, following a five-year bear market, and since then the pace of new account openings has steadily accelerated. The figures for new accounts are considered a rough proxy for new retail investors entering the market, although there have been cases in the past where individual traders have opened thousands of accounts using fake identifications. There is also an element of double-counting in the figures, as many investors open accounts in both Shanghai and Shenzhen.

Even as retail investors continue to pile in to the market, foreign investors have become increasingly cautious about mainland shares and one international fund manager said he now had more of his Chinese assets in cash than at any time since the government first allowed foreigners limited access to domestic stocks. Foreign investors are restricted to buying a combined $10bn in locally listed stocks.

Prior to the February correction, Beijing had tried to cool market sentiment, publishing prominent editorials in the state-controlled press warning of the risks involved in stock investments. However, since then the government has been conspicuously quiet, leading many investors to assume the leadership has granted its tacit approval to the ongoing bull run.

"We expect the government to come out with more measures to cool the market soon," said JPMorgan chairman of China equities Jing Ulrich