China stocks are on fire, but for how long?

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China's equity market has been on a tear, overtaking India to become the world's top performing major market on Thursday, but investors are starting to question how long the A-shares party will last.

The Shanghai Composite jumped 4.4 percent on Thursday, its biggest single-day percentage gain since December 2012, on speculation Beijing will turn on the stimulus taps again. The benchmark index pared some gains in a volatile session on Friday, down 0.5 percent around 2,883 midday.

The market, which is at its highest level in about 3 ½ years, is up 37 percent year-to-date, trumping the 35 percent advance in India's Sensex index.

The bulk of the gains came after the People's Bank of China's (PBOC) surprise rate cut on November 21, with the market up 17 percent just in the past two weeks.

While the government's proactive policy stance is partly responsible for the gains, increasing enthusiasm among retail investors is what's really powering up stocks, say strategists.

Retail money is coming back into equity markets because investments that retail investors have been keen on in the past few years, like wealth management products (WMPs) or real estate, are not performing well, said Stephen Sheung, head of investment strategy at SHK Private.

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"Returns on other mainland investment products - WMPs, trusts, deposits - are dropping on lower PBOC rates. While, sentiment in property markets is still weak despite loosening of property curbs," he said.

Last month, more than a million new brokerage accounts were opened in China, up 280 percent year-on-year, according to Reuters.

How far will the market run?

Sheung, who predicts double-digit gains in the market next year, expects the retail frenzy will continue to fuel gains.

He notes that just a small portion of domestic bank deposits – which amounted to 112 trillion yuan ($18.2 trillion) at end-October – need to be mobilized in drive the market higher. The Chinese stock market capitalization stands at $4.66 trillion.

While the timing of the stock rally coincides with the opening of the highly-anticipated Shanghai-Hong Stock Connect on November 17, market participants say the cross-border trading program has not been a large contributor to recent upside.

"Uptake of the Connect scheme has been underwhelming since it launched last month. There has been no flood of foreign capital into Shanghai," said Mark Williams, chief Asia economist.

Caution: Risks ahead

Williams is less convinced that the market will repeat this year's stellar performance in 2015.

"We forecast the stock market to make more headway, but do not expect it to remain on a tear," he said.

He forecasts the index will end next year at 3,000, around 100 points above current levels.

"There are still major headwinds facing banks, property developers and industrial firms, which make up much of the Shanghai Composite," he said.

"If the recent signs of mania – such as the frenzied pace of new equity account openings – trigger a further substantial rally in the market, we would be surprised if it didn't largely unwind further down the road."