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Yesterday the huge ongoing inflow of domestic and foreign funds pushed the Shanghai stock index to a 5-year high with much of the buying focused on banks and blue chips.

 

The benchmark Shanghai Composite Index, which had seen five consecutive days of gains, broke the 2000-point psychological barrier and jumped 2.3 percent to close at 2017.28. This is the highest since July 27, 2001.

 

The index is up approximately 72 percent since the beginning of this year, making China one of the world's best-performing equity markets.

 

The rally gathered steam after the government initiated regulatory and structural reforms to convert US$250 billion worth of state-owned non-tradable shares to those which could be traded.

 

The market surge is also a reflection of China's fast-growing economy and wide expectations of the yuan's further appreciation. These factors have combined to suck in a continuous inflow of investment funds from institutions, analysts say.  

 

The exchange rate of the renminbi against the US dollar hit a new high last Monday with the central parity rate at 7.8644. It was 7.869 yesterday.

 

Figures from Shanghai-based Wind Data show that since September 22 mutual funds have raised 80.6 billion yuan (US$10.2 billion) to invest in the market.

 

In the past two weeks alone eight of these funds raised a combined 30 billion yuan (US$3.8 billion) indicating a new wave of capital for equities.

 

Wind Data predicts that by the end of this year more than 100 billion yuan (US$12.7 billion) of new capital would flow into the market.

 

Meanwhile the central government has quickened the pace of permitting more foreign capital into the stock market. The government granted US$400 million in new quotas in the past week to qualified foreign institutional investors. This brings the overall quota to US$8.645 billion.

 

"Those new funds are mainly invested in bank shares and other blue chips which have steady and continual growing potential," said Zhang Qi, an analyst with Haitong Securities.

 

China Merchants Bank, which gained 1.1 percent on Friday, jumped 6.6 percent to 13.50 yuan (US$1.7). Industrial and Commercial Bank of China, the country's largest lender, climbed 3.2 percent to 3.92 yuan (49.6 US cents) after gaining 9.8 percent last week.

 

"Increasing confidence in the country's economy has boosted bank shares which directly reflect the country's macro-economic situation," said Dorris Chen, senior analyst with BNP Paribas. "Also, expectations of an appreciation of the Chinese currency are helping yuan-denominated shares to rise," he said.

 

Another heavyweight blue chip, Asia's largest oil refiner Sinopec Corp, surged 7.8 percent to 7.87 yuan (99.6 US cents) following Nymex crude's fall to a 17-month low at Friday's close.

 

Zhang Yichi, who manages a mutual stock fund that sold out within two days, believes the market will remain bullish next month. He predicted that the return for mutual fund investors next year will achieve 25 to 30 percent.

 

The market capitalization of the Shanghai Stock Exchange crossed 5,000 billion yuan (US$633 billion) on November 15.

 

(China Daily November 21, 2006)