SHANGHAI, April 8 — China’s Shanghai Composite Index briefly surpassed 4,000 for the first time since 2008, extending the world’s biggest stock-market rally as investors bet authorities will increase monetary stimulus to bolster economic growth.

The benchmark equity gauge surged to as high as 4,000.22 before paring gains to close 0.8 per cent higher at 3,994.81. The index has doubled since January 2014 as traders borrowed a record amount of money to buy shares, new investors opened stock accounts at an unprecedented pace and government officials endorsed the rally. A gauge of Chinese shares in Hong Kong jumped 5.8 per cent for the steepest gain since December 2011.

China’s central bank has cut interest rates twice since November and analysts predict authorities will ease policy further to keep economic growth above their 7 per cent target. The nation’s individual investors, who account for about 80 per cent of equity trading, may view the 4,000 mile-stone as a signal to boost holdings, according to Shenwan Hongyuan Group Co, the nation’s second-largest brokerage by market value.

“Breaching the 4,000 level can be read by retail investors as a bullish signal,” said Gerry Alfonso, a director at the international business department of Shenwan Hongyuan in Shanghai.

While the market’s rapid ascent has fueled concerns of a bubble, Shenwan Hongyuan estimates the Shanghai index may rise to 4,500 as individuals shift more of their assets into equities. The gauge is still well below its all-time high of 6,092.06 in October 2007.

Mobius outlook

The Hang Seng China Enterprises Index in Hong Kong rallied 5.8 per cent at the close, while the Hang Seng Index advanced 3.8 per cent to the highest level since May 2008.

Industrial and financial shares led gains in both Hong Kong and Shanghai. Citic Securities Co and China Railway Group Ltd both surged more than 4 per cent. Gome Electrical Appliances Holding Ltd jumped 35 per cent in Hong Kong after Citigroup Inc recommended the stock over its mainland rival Suning Commerce Group Co because of cheaper valuations.

Net purchases of Hong Kong shares through the Shanghai exchange link surpassed the daily record within the initial half hour of trading today, before filling the CN¥10.5 billion (RM6.15 billion) quota for the first time.

China’s stocks may fall 20 per cent as shares have risen too fast, Mark Mobius, who oversees about US$40 billion as the executive chairman of Templeton Emerging Markets Group, told reporters in Hong Kong.

Relative value

The Shanghai Composite is valued at 15.3 times estimated earnings for the next 12 months, compared with the five-year average of 10.2, according to data compiled by Bloomberg. In the technology industry, the best-performing part of the market this year, shares are trading at an average 220 times reported profits, the most expensive level among global peers.

A big retreat is unlikely unless authorities take steps to cool the market, said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co, which oversees the equivalent of US$322 million.

The Shanghai index slumped 7.7 per cent on January 19 after the China Securities Regulatory Commission suspended three of the nation’s biggest brokerages from adding new margin trading accounts and said securities firms shouldn’t lend to investors with less than CN¥500,000 (US$80,594).

The gauge has since rebounded 28 per cent as the central bank governor and the CSRC endorsed the flow of funds into shares. China needs strong support from the equity market as the economy faces relatively large pressures this year, the official Xinhua News Agency reported yesterday.

Booms and busts

Valuations have climbed too high, Vincent Chan, the head of China research at Credit Suisse Group AG, said in an April 2 phone interview. He sees a correction that will take the Shanghai gauge back down to 2,800 by the end of the year, amounting to a drop of about 30 per cent. Losses may accelerate as margin traders liquidate their positions, he said.

The outstanding balance of margin debt on the Shanghai Stock Exchange surpassed CN¥1 trillion for the first time this month, a nearly fourfold jump from just 12 months ago, while investors opened a record number of new trading accounts in the week ended March 27.

China’s stock market has a long history of booms and busts. The Shanghai Composite has recorded more than 50 bull and bear markets, defined as a move of at least 20 per cent from a recent peak or trough, since Bloomberg started compiling the data in 1990. The current gain of about 100 per cent compares with an average advance of 122 per cent during previous rallies.

“It’s the nature of the Chinese bull market that every 7 to 8 years, a few investors get rich quickly,” Earl Yen, the chief investment officer at CSV China Opportunities Ltd in Shanghai, which oversees more than US$200 million, said in a phone interview yesterday. “Then the bubble bursts and mass retail investors stay away from the market.” — Bloomberg