CHINA’S stock markets are at their highest levels since December 2013, with a dramatic rally that began a little over a week ago sparking hopes that one of the world’s worst-performing equities markets has finally climbed out of the basement.

    The question for investors is how long the rally can last. Some analysts suspect the rally is driven by speculators betting on policy easing in the money and housing markets, rather than confidence in consumer demand.

    This year has already seen two, less steep, rallies fizzle out. Some analysts argue this one will prove more durable, even if it is partially fuelled by liquidity.

    Low valuations for blue-chip shares and potential fresh foreign fund inflows have combined with the positive data to set off a rally that they say could hold through the third quarter, and possibly set the stage for a bull market in 2015.

    The Shanghai Composite Index has gained nearly 7 percent in eight days. On Thursday, the index stood around 2,180 points, up more than 3.3 percent since the start of the year, and stocks in mainland companies in Hong Kong were up around 3.6 percent.

    A recent poll showed fund managers are planning to shift more assets into stocks in the next three months.

    “There are clear signs that both domestic funds and foreign institutions are building positions in large-cap stocks in Shanghai recently,” said Chen Huiqin, a senior analyst at Huatai Securities in Nanjing.

    “That’s because Shanghai market valuations, in particular for index heavyweights such as banks, are really too low. With so many individual hot stocks, you can safely say that the market will stay bullish.”

    Most large-cap Chinese stocks trade at much lower price-to-earnings (P/E) valuations than peers in other countries, with banks in particular trading at major discounts.

    Brian Ingram, chief investment officer at Ping An Russell Investment Management in Shanghai, had expected a stock market recovery, but says he had not anticipated the breadth of the rally.

    “The fact that cyclical names are starting to improve as well is surprising, and might be seen as a sign that confidence in the economy has improved, which means the rally could last longer,” Ingram said.

    There are also less positive factors in play, namely a looser money policy that could be pushing speculative cash into equities, and signs that weak economic fundamentals are causing the government to relax curbs on real estate investment.

    While positive for stocks in the short run — especially since real estate developers are index heavyweights that can also pull up banking shares — both factors are seen as unsustainable.

    “The recent rally of Hong Kong and mainland stock markets is pretty much liquidity driven,” said Ben Kwong, director at KGI Asia in Hong Kong.

    Economists noted that in addition to steadily opening liquidity taps this year, the People’s Bank of China also recently loaded 1 trillion yuan (US$161.92 billion) into China Development Bank to spend upgrading shanty towns.

    Ingram saw the liquidity stimulus as part of a government strategy to prop up consumer demand, but he noted that these moves do nothing to address enduring fundamental distortions in Chinese credit and real estate markets.

    Economists believe a sharp correction in property prices is the biggest threat to China’s near-term economic stability. (SD-Agencies)