Bullish stock market echoes reform optimism, calls for caution

Gao pointed out that policies promoting public innovation and entrepreneurship have fuelled the surge of small caps stocks.

The ChiNext Index, the Nasdaq-style board that tracks growth enterprises, has soared over 70 percent this year.

Cautiously optimistic

This rush to invest has raised the concerns of the government, and many analysts have said that a slower and steady market rally would benefit everyone.

Shares in CSR Corp and China CNR Corp, China's major bullet train makers and two of the biggest success stories of SOE reform, have surged over 400 percent since January. However, investors were caught by surprise when the share prices dropped last week by over 20 percent in the space of two days.

"This should teach investors that volatility is the nature of the stock market and one should be always aware of potential risks," said Li Daxiao, chief economist with Yingda Securities, adding that the price- earning ratio of many listed companies, especially those on the ChiNext Index, was irrationally high.

Most security traders expect the strong market to continue to rise to a record new high surpassing the peak of 6,124 points in 2007, but also warned of short-term fluctuations along the bullish run.

The CSTC put a notice on its website on Tuesday to warn investors to be cautious with trading, and several security traders have adjusted their marginal buying policies to avoid possible risks.

Regulation passed this month allows fund managers to lend shares for short-selling after mainland markets close, it also increased the number of stocks investors can short sell: This is likely to result in more market volatile

"The bubble is there and it is growing bigger. You are gambling if you simply ignore the fundamentals of the economy and public companies," Li said.