By Jin Jing (China Daily)
Updated: 2008-01-03 10:22

Although the stock market rally in the past year seems to have lost much of its steam, analysts remain confident of the upward trend, albeit at a much more moderate curve.

Any notion of a possible meltdown has been largely discarded as the market still basks in ample liquidity. The rumblings of the US subprime mortgage crisis sound nothing more than a vague and distant threat.

So far, government credit tightening measures, including interest rate increases, have made only short-lived impacts on investor sentiment because of the lack of leveraged trading. What's more, the huge supply of new scrips in various mega IPOs were absorbed without causing any durable liquidity strain.

What's helped cool down the stock market fever a little is growing investor concern about overvaluation and a possible slowdown in corporate earnings growth. But with so much liquidity swishing around the system, none of these factors could squeeze out the market bull.

"The excess liquidity in the Chinese economy is unlikely to disappear anytime soon," said Shen Minggao, an economist at Citigroup.

Shen added that the rising trade surplus and current surplus had led to speculation on currency appreciation. Capital inflows through direct investment and current account activities have also surged.

In addition, recent re-pricing of risk amid the subprime crisis in developed markets and expected Fed cuts would mean more capital inflows to emerging market economies.

"We expect in the near term a range-trading or even market correction in the coming months," said Jerry Lou, an economist at Morgan Stanley. But as the ample liquidity still remains, "we are likely to stay bullish for most of 2008".

The government has also announced some measures to encourage capital outflows, including the qualified domestic institutional investor system and the "through train" for individuals to invest in the Hong Kong stock market.

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