That bull-market feeling is back in China.

The Shanghai Composite Index (SHCOMP)’s advance to a three-year high today extended its gain over the past month to 14 percent, trouncing all 92 of the world’s other benchmark equity indexes by at least six percentage points. Mainland investors are opening stock accounts at the fastest pace in three years, trading in Shanghai surged above 500 billion yuan ($81.3 billion) today for the first time and initial public offerings have returned an average 180 percent in 2014.

Central bank efforts to bolster China’s economic growth are reviving optimism in the $4.6 trillion stock market after the Shanghai Composite lost more value than any other major benchmark index worldwide in the past five years. While exchange-traded fund investors are paring holdings on concern the gains won’t last, Morgan Stanley (MS) says there’s potential for an “ultra-bull” rally where share prices double in 18 months.

“New account openings are a sign that there is fundamental investor participation,” said Jonathan Garner, the Hong Kong-based head of Asia and emerging-market strategy at Morgan Stanley who predicted in June that monetary stimulus would drive a second-half rally in Chinese shares. “Moves on high volumes should always be taken seriously.”

David Fuller's view

China orchestrates its bull and bear market moves and this break to the upside has been overdue. 

Mainland China’s long bear market has been overdue, judging from the Shanghai A-Shares Index, which reached a bubble peak with many other stock markets in October 2007.  It also had a brief, baby-bull run following the crash, but this was choked off in August 2009 as China tightened monetary policy to curb property speculation.

This has finally succeeded in 2014 and the lengthy equity bear trend ensured that very few people in China were interested in the stock market five months ago.  The Index above was one of the cheapest in the world, trading at a p/e of less than ten times earnings and yielding over three percent.  After this initial upward leg China is still competitive with a p/e of 13.21 and yield at 2.40%, compared to the S&P 500 Index’s 18.39 and 1.91%, according to Bloomberg.

Hong Kong’s Hang Seng Index remains very cheap at a p/e of 10.12 and yield of 3.86%, due to the prodemocracy demonstrations, which have now dwindled to mainly students.  Hong Kong should certainly participate as China’s bull market continues over the medium term, because it has no other divisive issue other than the desire to elect its own political representatives. 

There are always concerns and I have plenty of reservations about China’s authoritarian government.  Nevertheless, it runs a command capitalism economy so I have an overweight position in Chinese equities, which I have been changing recently.  Nevertheless, my net position will remain long until the government next reverses monetary policy and tightens interest rates.