"There's just too much liquidity out there, too much," says Chang Chun, a financial reform expert at the China Europe International Business School in Shanghai. "This is a psychological thing."
China's stock market system is still relatively immature, and trustworthy information about a company's performance is still hard to come by. So the average investor does little or no research.
Government officials began cautioning several weeks ago against "blind optimism" in the stock market. Banks were ordered to stop making loans to people who were speculating in the market. Trading volumes have been so high that the Shanghai Stock Exchange recently warned that the country's electronic trading system could be destabilized.
Stock prices fell sharply for four consecutive days early last month as investors seemed to contemplate the possibility of an overheated stock market.
After a brief pause, they rushed in again. Foreign money is also piling in, according to JPMorgan, and hardly an analyst is willing to bet against the stock market.
"You can't be a fundamental investor in China," said Michael Pettis, a professor of finance at Peking University. "You can only speculate. Fundamental investors make long-term cash flow projections. In China, there's not good information or corporate governance."
Pettis, who has long been a skeptic of China's markets, is raising a fund to invest in Chinese stocks, based on his projections of the inflow that will push up prices.
"There's a huge amount of money in the banking system with nowhere to go," he said. "I think you're going to see that money getting out of the banking system."
Mutual funds are also helping some individual investors, while others are scrambling into initial public offerings, which over the past year have had a strong opening-day track record.
Of the 15 companies that went public on the Shanghai Stock Exchange, 12 of them saw opening-day rises of more than 10 percent.
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