The benchmark Shanghai Composite Index ended up 2.15 percent higher on Monday at an all-time record of 6,030 points, even after the government raised bank reserve requirements over the weekend to take some liquidity out of the economy.

Such a stock rally would have looked impossible at the beginning of the year.

It was only in February that the Shanghai composite index broke through the 3,000-point mark. Now, the market has surged ahead and is up more than 120 percent so far this year.

Optimists are right to argue that the continued surge in the market is a reflection of the underlying strength of the Chinese economy. As the world's fourth-largest economy, China has not only witnessed consecutive double-digit growth in the past four years, but is also poised to register the fastest growth in more than a decade this year.

However, caution is more than justified as the domestic stock markets keep defying gravity to soar. The authorities should take measures to highlight and guard against the danger of excess optimism.

Government officials have been full of warnings about potential bubbles and the risks of buying equities since early this year. But that has not effectively dissuaded investors from flooding into the stock market as part of an unprecedented wave of retail optimism.

The booming economy has helped corporate earnings increase by 70 percent in the first half of the year, laying a solid foundation for the resurgence of the domestic stock market.

Yet, the rise in the market means that the level of share prices could exceed the growth in listed companies' earnings, making shares dangerously overvalued.

The rally may have further to go, but a sharp correction can also just be around the corner. It is urgent that policymakers should make sure a drop in share prices will not cause a collapse in investors' confidence which is crucial to the long-term development of China's capital market.

Efforts to soak up excess liquidity that keeps boosting stock prices are needed.

(China Daily 10/16/2007 page9)