Caution as China's stocks soar

A raging bull is on the loose in China's stock market, which has just opened its doors to the world, but prospective New Zealand investors may want to approach the mega-rally with caution.

The Shanghai Composite, the mainland's largest stock index, rose 23 per cent in the 12 trading days to market close on Monday.

And it has risen more than 40 per cent since July 21, making the 8.25 per cent New Zealand's NZX 50 Index has gained over the same period look modest.

Chinese retail investors opened 370,000 new trading accounts in the last week of November and the rally has catapulted China's sharemarket ahead of Japan's to become the world's second-biggest, by value, behind the United States, according to the Economist.

Converging factors are driving what Chinese media have dubbed the "super-bull".

China's central bank has been putting cash into the world's second-biggest economy and made a surprise interest rate cut last month, and a downturn in the Chinese property market has helped to push investors towards shares.

Meanwhile, a new trading link that started on November 17 gives foreign investors previously unavailable access to a select group of Shanghai-listed stocks, known as the A-shares.

Daniel Metcalfe, an Auckland-based adviser with sharebroker OMF, describes the recent gains in Chinese shares as "phenomenal" and says New Zealand clients have been getting in on the action.

"Some people have made some very good money in the short term."

But Metcalfe said the Chinese market was highly speculative, and the strength of the rally was a concern.

"It wouldn't surprise me to see a decent correction in the very short term on the China A-shares."

That correction may have already begun. The volatile Shanghai Composite plunged more than 5 per cent - its biggest one-day decline since 2009 - yesterday.