Booming China stocks test government's will

By Lu Jianxin - Analysis

SHANGHAI (Reuters) - Rising to a record high immediately after the central bank hiked interest rates, China's booming stock market has entered a battle of wills with the government -- a battle that it may well lose.

Millions of Chinese investors, trading on mobile phones or in brokerage halls around the country, shrugged off the central bank's monetary tightening, which was partly designed to prevent the market from overheating.

Instead, investors pushed up stocks in massive turnover that was about 10 times year-ago levels.

"The market seems to have largely ignored the signal that the central bank has sent about a soft landing," said analyst Zhao Wuling at Everbright Securities. "But underestimating the central bank may prove dangerous."

The Shanghai Composite Index .SSEC opened down 3 percent but quickly rebounded to climb as much as 1.3 percent, hitting a record intra-day high of 4,083.416 points. It ended the day up 1 percent at 4,072.225.

That means authorities are likely to take stronger steps in coming weeks to restrain the market and drive out speculative money, analysts and fund managers believe.

They think the government may want stocks to pull back 10 or 20 percent in the next few months to let air out of the bubble -- and that a further rise of 10 percent would almost certainly produce harsh official action.

The monetary tightening was the latest in a series of efforts this month to restrain the market, which is up over 50 percent this year after a 130 percent leap in 2006.