The bull seems to have an edge over the bears in the stock market in the Year of the Monkey, which started on January 22, as brokers and fund managers are clamoring to raise their equity exposure.

The Shanghai Composite Index, a benchmark index that groups all the 779 public companies listed on the local stock market, rallied 10 percent in 2003 while the Shenzhen stock market rose 26 percent, indicating that the bull has already returned to drive the two markets.

Shanghai Shenyin Wanguo Research and Consulting Co Ltd, a research unit of one of China's leading brokerage houses Shenyin and Wanguo Securities Co Ltd, boldly predicted that the Shanghai Composite Index would climb as high as 1750 points this year.

That means the index will have room to advance 5.5 percent this year, based on the calculations of the last closing price of the index on Friday.

China's fast-growing economy that is expected to expand 8.5 percent this year is the main factor driving the bull market. The rapid growth will probably be translated into better corporate earnings for publicly traded companies, which will in turn lure buying, driving up the broader market.

That explanation holds water as the markets have already witnessed a substantial change over the past year.

In the period starting from the beginning of 2000 to June 2001, China's two Class-A share markets also saw a rally in share prices to a historical high since China revived stock trading in 1990.

However, the bullish sentiment was not propelled by the growth in economic and corporate earnings, but by the excess liquidity from private funds.

The private funds sought short-term profits for their clients, namely listed and state-controlled firms that borrowed money illegally from commercial banks for stock investment, pushing up share prices through illegal practices such as buying and selling on their own accounts.

When shares soared to lofty levels, they unloaded the stocks to cash out, leaving retail investors in the lurch.

Corporate earnings and fundamentals of listed companies were not factors investors took into account before choosing the stocks to buy.

The economy grew at an annual rate of 8 percent in 2000 in China, but its stock markets soared a hefty 52 percent that year.

But the double crackdown from the central bank and the stock market regulator burst the bubble, which was inflated by speculative buying.

This move immediately rocked share prices which fell for the following two-and-a-half years.

The action also swept out of the stock markets the speculators who were held liable for creating the bubble.

Mutual funds replaced them and became major players on the market.

More than 30 mutual funds were sold to the public last year, bringing to more than 100 the number of securities investment funds in China that now manage 160 billion yuan (US$19.28 billion) of assets.

The speculative buying and selling has been gradually replaced by a new pattern of investment initiated by fund managers, who pick up stocks with relative low valuation but with earnings growth potential.

Some of these stocks the fund managers invested into last year included Shanghai Baoshan Iron and Steel Co Ltd, the country's most profitable steel maker, Shanghai Automotive Co Ltd, the listed arm of China's largest car maker Shanghai Automotive Industry Corp, and China Petroleum and Chemical Corp, or Sinopec, the country's biggest oil refiner.

These are companies in industries that are fuelled by the strong economy.

Shares of Baoshan Iron and Steel soared 72 percent in 2003 and shares of Shanghai Automotive nearly doubled last year.

However, their upsurge was largely propelled by higher earnings growth. Baoshan Iron and Steel more than doubled its earnings in the first three quarters of last year and Shanghai Automotive saw a 138 percent increase over its profit for the first nine months.

As long as the rapid economic growth can be maintained, money will continue to be pumped into companies until share prices fully reflect their fundamentals and corporate earnings.

(Shanghai Daily February 16, 2004)