China Shares Rally to 7-Year High but Investors May Want to Wait

TAIPEI, Taiwan (TheStreet) -- Shares on China's major exchange hit a seven-year year Friday after months of quick gains, but domestic pressures threaten to drag it down again and foreign investors should be cautious.

The Shanghai Composite Index, where the titans of China's 2,500 listed companies are traded, reached a volume of 5,050 early Friday but quickly gave more than 100 back. Chinese shares gained 47% over all of last year.

But a stock chart looks like the back of a stegosaurus, with sharp spikes and dips. Stocks posted a 6% drop one day in the final week of May and a 4.9% gain Monday.

China's shares are still emerging. Its central bank is weighing another round of restrictions on margin lending to ease volatility in a highly leveraged market. A pack of IPOs, including 23 set for June, is diverting some funds away from the broad market into those companies.

"I would stay out for the time being. I'm not someone who likes volatility. I trade long term," said Chester Liaw, economist at Forecast Pte in Singapore. "I'd watch out for more news from the central bank to see if they're going to introduce any new policies and whether they are going tighten margin lending."

Before the 2014-2015 rally, foreign investors worried because of the market's record of poor transparency, risks to minority shareholders and spotty regulations. Over the past year China's own citizens have invested heavily -- a prime reason for the surge -- to park their wealth as the historically preferred property market softens. Some of them are worried, too.

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