BEIJING - China's stocks reached a record-breaking seven-month high, in line with the upsurge in world stock markets stimulated by the flood of cash from the US Federal Reserve.

The benchmark Shanghai Composite Index was up by 42.56 points, or 1.38 percent, to 3129.50 by the Friday close. It has rebounded 32 percent since reaching this year's low on July 5. The Shenzhen Component Index climbed 137.63, or 1.01 percent, to close at 13733.36. Meanwhile, stocks in emerging markets, which are tracked by the MSCI emerging-markets index, rose by 0.4 percent to 1155.94 on Friday, with a weekly gain of 4.5 percent.

"China's stock market is sensitive to the value of the dollar. After the US announced the quantitative easing policy, a large inflow of capital will continually weaken the dollar, and that will lead a rally of the stock market in China, as well as in other countries of the emerging economies," said Shen Gaoming, chief economist of Citigroup Global Market Asia Ltd.

According to Barclays Plc, capital inflows will continue into emerging economies and result in good scenarios for stock markets. The quantitative easing policy almost matched market expectations, and whether it can strengthen companies' confidence to expand investment depends on the market performance over the next six months.

The Fed's new round of pumping money into the economy by purchasing $600 billion of government bonds will significantly boost liquidity in capital markets, and the speculative capital will heat the emerging markets and asset-bubble risks may grow, analysts said. In order to curb the speculative capital inflows, China may slow the increase of interest rates, said Gong Fangxiong, chief economist at JP Morgan China. That is because capital always flows from the countries with lower interest rates to the higher ones - which will increase the exchange rates as well as inflation, and decrease the exports of countries with higher interest rates. The bond purchase plan will further push commodity prices and the October consumer price index may accelerate to 4 percent, Sealand Securities Co Ltd said, so the central bank may again raise interest rates in November. In addition, it is possible that China will tighten capital controls. A chief researcher at the central bank said China should return to a "normalized" monetary policy.

"Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters," the Fed said.

China Daily

(China Daily 11/08/2010 page14)