JUST below the surface of China’s world-beating equity rally, signs of trouble are emerging.

    While the Shanghai Composite Index touched a five-year high Friday after a 63 percent gain during the past year, other gauges of investor enthusiasm are tumbling. Turnover sank 47 percent from its peak in December, while new equity account openings fell 50 percent and purchases using borrowed money dropped 38 percent. The number of stocks reaching new 52-week highs has declined 75 percent in the past six weeks.

    The indicators suggest to Deutsche Bank AG and Fortune SG Fund Management Co. that China’s A shares are no longer a one-way bet after monetary stimulus and a flood of new individual traders propelled the Shanghai index to eight consecutive months of gains through December.

    Windsor Capital, one of China’s top 10 performing hedge funds, said last week investors will have to wait until the middle of this year before the US$5.1 trillion market resumes its advance.

    “We have seen fewer new account openings, narrower trading turnover and heightened market volatility recently in the A-share market,” Chang Yuliang, the chief Chinese mainland and Hong Kong strategist at Deutsche Bank, Germany’s largest lender, said in comments Friday. “This does not bode well for this liquidity-driven rally.”

    Chinese investors opened about 447,000 accounts to trade equities in the week to Jan. 16, down from a seven-year high of 892,000 in mid-December, while the number of accounts with transactions fell 29 percent. The value of shares traded on the Shanghai Stock Exchange has dropped to 420.7 billion yuan (US$67.5 billion) from a record 792.7 billion yuan Dec. 9.

    Meanwhile, the number of Shanghai Composite stocks recording new 52-week highs fell to 55 last week from 218 in December. Volatility has also increased, with a gauge of 30-day swings in the Shanghai index reaching a five-year high.

    Government efforts to cool the growth of margin loans have curbed one of the biggest drivers of the rally. Stock purchases using borrowed money on the Shanghai exchange declined to 75.1 billion yuan Thursday from their Dec. 9 record of 121.8 billion yuan after policymakers suspended three of the nation’s biggest brokerages from loaning money to new equity-trading clients and said securities firms shouldn’t lend to investors with assets below 500,000 yuan.

    Stocks favored by margin traders will probably underperform as the Shanghai Composite trades between 2,950 and 3,450 in the first half, according to Jian Yi, a Beijing-based partner at Windsor Capital, whose fund has returned about 29 percent in the past six months.

    While some indicators of investor enthusiasm are falling, they are still at “very healthy” levels, Jonathan Garner, the Hong Kong-based head of Asia and emerging-markets strategy at Morgan Stanley, said in comments Friday. Turnover on the Shanghai exchange is still 142 percent above its one-year average, while new account openings are also more than twice as high.

    If China’s economic fundamentals don’t start to improve soon, stocks will fall, said Nicholas Yeo, Hong Kong-based head of Chinese mainland and Hong Kong equities at Aberdeen Asset Management, which oversees about US$526 billion.

    “A shares are driven by liquidity rather than fundamentals,” Yeo said. “It’s a mispriced market.”

    China’s economy grew 7.4 percent in 2014, the slowest pace in 24 years. The expansion will weaken to 7 percent this year, according to the median estimate in a survey of economists. A preliminary purchasing managers’ index for manufacturing was 49.8 for January, below the 50 mark that divides expansion and contraction, data showed last week. (SD-Agencies)