The stock market has continued to suck in investors, pushing the Shanghai Composite Index to a new record high yesterday when the exchanges reopened after a three-day New Year break.

The benchmark indicator surged to 2,716 points by the close, up 1.5 percent from the previous record, set last Friday.

It has risen a total of 130 percent, despite occasional faltering, since the rally took off at the beginning of 2006. And analysts expect the momentum will be maintained by a continuous inflow of funds, particularly from institutional investors, including mutual funds and insurance companies.

This rally is sustainable because "it is a very healthy rally", said Erwin Sanft, head of China Research of BNP Paribas Securities of France. Sanft said the Chinese stock market bull run was underpinned by the buying of stable long-term funds that focused mainly on blue-chip stocks.

"It is not a rally led by small-cap poor-quality stocks," he stressed.

Sanft and others estimated that the average PE (price-to-earnings) ratio of blue-chip stocks could go beyond 30 times from the 20 times at present. The PE ratio of small-cap stocks could go even higher to 40 to 50 times, they predicted.

Continuing the trend set over the past 12 months, turnover on the Shanghai Stock Exchange yesterday rose 40 percent from last Friday to 83.95 billion yuan. The average daily turnover in 2006 amounted to 23.7 billion yuan, up about 190 percent from 2005, indicating the scale of the capital inflow into the stock market.

The Chinese stock market boom is "led by the huge amount of liquidity", said Sanft. Part of the funds that have been rushing into the stock market in recent months were channelled from bank deposits and other investment markets, including commodities and gold.

The sectors that have benefited most from the stock market rally include services and capital goods.

Within the services sector, banks have done particularly well. The share price of the Industrial and Commercial Bank of China, for instance, has gone up a total of 78 percent from its debut in October 2006. It closed at 6.05 yuan yesterday, down from 6.20 last Friday.

Currently there are seven banks listed on the stock exchange. Three more are expected to obtain a listing in 2007. "The banking sector will remain a focus for the stock market," said Gao Yuan, an analyst at Everbright Securities.

Zhang Yidong, an analyst at Industrial Securities, agreed. "Product innovations will help banks to do well in the coming years," he said. What's more, the lowering of the corporate tax to a unified rate of 25 percent from 33 percent in the past should benefit the financial industry the most, Zhang added.

"I expect banks' profits will increase by an average 20 percent a year for the next five years," he said.

Sanft of BNP Paribas predicted that Chinese banks' earnings will be "very good" in 2007. He said the only potential risk was non-performing loans (NPLs). But he said he did not expect NPLs to increase in the next two years.

BNP Paribas was particularly bullish about the capital goods sector. Mechanization, Sanft said, would lead China's fourth stage of industrialization with the extensive use of machinery spreading through the manufacturing industry as China moves up the value-added ladder.

Zhang of Industrial Securities said he expected the profit growth of manufacturers of machinery and equipment to continue at a brisk pace. In the first eight months of 2006, these companies' profits had increased an average of 35 percent from a year earlier.

Huang Dongsheng, an analyst at Changjiang Securities, predicted the share prices of heavy machinery manufacturers would increase by an average of 25 percent in 2007.

Editor: Yan