Investors' appetite for equities seems to have returned amid anticipation of more government measures to boost the slowing Chinese economy.
The benchmark Shanghai Composite Index has rebounded by 19 percent from the August low of 2850.71 points and analysts said that the improved market sentiment may continue to drive equity gains.
Leveraged trading has resumed as margin traders who borrow money to purchase stocks have increased their holdings over the past week. The outstanding balance of margin loans at Shanghai and Shenzhen stock exchanges rose to 957.8 billion yuan ($152 billion) for five consecutive days as of Oct 4, indicating a strong buying sentiment.
The stock market rally contrasts with the not-so-bright picture of the Chinese economy. The disappointing economic data for September showed that the Chinese manufacturing sector remained in contraction while external trade continued to decline.
China is set to release its GDP data for the third quarter later on Monday. Most economists forecast a 6.8 percent growth rate, the slowest pace since 2009, according to a Bloomberg survey.
"Despite slowing economy, investors' tolerance for risks is rising ... and there is a strong anticipation for additional policy stimulus and monetary easing," Li Shaojun, a strategist at Minsheng Securities Co, wrote in a research note.
Investors' sentiment improved sharply last month, with an index tracking investors' confidence increasing 24.2 percent from August to 51.3 in September, according to a survey by China Securities Investor Protection Funds. Nearly 30 percent of investors expect the benchmark Shanghai Composite Index to rise over the next three months, while 39 percent of the investors interviewed expect the index to be flat, the survey showed.
Analysts said the comeback of investors' confidence is not so much based on the improving economic fundamentals but on the belief that the policymakers in Beijing will introduce more monetary easing and pump up more infrastructure investment to rein in the economic slowdown.
Most analysts anticipate that Chinese monetary authorities will further cut interest rate and banks' reserve requirement ratio in the fourth quarter as the slower-than-expected rise of consumer price last month has given policymakers greater room for monetary easing.
Meanwhile, the Fifth Plenum, a key meeting of the Communist Party of China Central Committee, will be held from October 26 to 29 to draft the next Five-Year Plan for the country's economic and social development, which will be another policy catalyst for the stock market.
The rekindled interest in the country's stock market also reflected a shortage of attractive assets in China amid the economic slowdown, analysts said.
The cooling property market and the dropping yields on government bonds as well as many wealth management products sold by banks have resulted in capital flowing back to the equities in quest for cheap stocks after the dramatic fall of valuations during the summer, they said.
