2006 was a hot year for the Chinese stock markets. Already performing among the best in the world, they are forecasted to continue this trend through 2007.

In 2006, major A and B share indexes Shanzheng and Xinhua Fushi saw profit gains of 130 and 80 percent respectively, greatly exceeding expectations. China IPOs, including ones on the Hong Kong exchange, drew more than ＄50 billion, beating even U.S. IPOs. 

On December 28th, China's National News Center published an economic greenbook entitled,"2007: Economic Development Between China and World". It explains why 2007 will be structurally bull. 

First, favorable macroeconomic conditions will continue through 2007. Strong real gross domestic product growth will provide the market with liquidity, increasing confidence. 

In 2007, China's whole GDP growth will stay relatively high between 9.5 and 10 percent. The trade surplus will increase, and due to the expectation of continued appreciation of the yuan, capital flows will continue to flood into China. Furthermore, 16 trillion yuan worth of personal savings in China will gush into the stock market. 

Economics tells us that an abundance of capital can initiate a bull phase. Due to disequilibrium in the Chinese economy and the lack of investment channels, the Chinese market will rely more on the direction and scope of capital flows as opposed to firms' profits and returns. In the short and medium term, excess liquidity will provide much needed breathing room and will decrease the overall risk of a recession. 

Because of shareholder structure reform, much uncertainty has been removed from the market. And in 2006, China's Securities Regulatory Commission passed a new law easing restrictions on IPOs. 

Blue chip stocks are more stable than they were in previous years. As a result, QFII is allowing more and more foreign investment to enter China, with the brokerage industry integrating as well.

In January 2007, new accounting standards will be released in order to increase the transparency of listed firms and continue to attract foreign investors. Moreover, futures indexes will also appear on the market, with a 'bull effect' drawing in more investment. At the same time, policymakers will encourage foreign-listed firms to list on Chinese markets. And along with reforms to the banking sector and state-owned enterprises, the Chinese stock market (including Hong Kong) is poised to become the world's most active IPO market.

But are these changes beneficial to all Chinese stocks and industries?  

Although the emphasis of the forecast is that the market will be bullish, this does not mean that all stocks will go up. The government will continue to use policy measures to control the market and prevent overheating-- especially in real estate, energy, and metalworks, where overproduction is becoming an issue. The government will continue to implement measures to control the real-estate bubble. 

Despite the performance in 2006, due to excessive government intervention, the Chinese stock market is still not mature and lacks transparency. That said，many analysts believe that in this preliminary stage of development government intervention is not all bad-- but rather shows that the government is working to establish a prosperous market. Essentially, the answer to whether or not investors will enter the Chinese market in 2007 lies not in the performance of firms but in the performance of the government.