China's A-share market reopens on Monday, its first trading day of the Year of the Rat, losing heavily across the board. Photo: cnsphotos

Chinese mainland stocks might correct after a one-week, incredible run that sent the benchmark Shanghai index to nearly 3,400 points, financial experts and securities analysts predicted, following remarks by the banking and insurance regulator that China will crack down on illegal speculative activities to avert asset bubbles.

The experts said that the government is worried that its financial aid to coronavirus-hit companies will find its way into the domestic stock market, which has shown signs of irrationality in recent days. 

Chinese stocks experienced a bull run in the week ended Friday in what some overseas media called an incredible rally. The benchmark Shanghai Composite Index ended its best week in five years at 3,383.32 points, while the Shenzhen Component Index climbed to 13,671.2 points during the week.  

Trading volume also exploded, exceeding 1.5 trillion yuan ($214 billion) for five consecutive trading days on the two markets as of Friday. 

But the surge also caused some market concerns about volatility, particularly after the China Banking and Insurance Regulatory Commission (CBIRC) said over the weekend that some violations had reemerged on the Chinese mainland's capital markets.

A CBIRC spokesperson noted that high-risk shadow banks, some in new forms, have revived in China. Some capital has also flowed into the real estate and stock markets in an illegal manner, the spokesperson said. 

The person also stressed that the CBIRC will guide capital to flow from the virtual to the real economy, and it will forbid banks and insurance firms from participating in over-the-counter financing, and it will clamp down on illegal leverage and speculation to curb asset bubbles. Some analysts interpreted this move as a government gesture to cool down the equity market. 

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, said that the government doesn't want to suppress the stock market, but it does want to send a warning against a bull market that might come in a crazy, one-stop manner like in previous bull cycles. 

"China's economy has just been hurt by the coronavirus and has not totally recovered. If all the capital is pumped out of domestic companies and banking system into the capital markets, China's economy will get into bigger trouble - that's what the government is worried about," Dong told the Global Times on Sunday. 

Considering how mainland stocks performed last week, irrational sentiment has already taken hold among domestic investors, Dong said. 

"What the government hopes to see is that the real economy and stock markets can recover at a similar pace, and the stock bull run can help domestic companies develop their business," he noted. 

Kang Chongli, deputy director of research institute under Yuekai Securities, told the Global Times it's important that over-the-counter financial activities should be curbed in order to make the bull trend more "healthy" and "solid". 

"A government crackdown on runaway speculation and illegal leverage is necessary to lay a solid foundation for the bull run, which we expect would last for a long time in China," Kang said on Sunday. 

Experts said a short-term correction is likely, but the trend of a bull run is unlikely to be reversed. 

"The trend is not only backed by the recovery of the Chinese economy, but by China's low interest rate and loose liquidity policies. The current active trading also supports the formation of a long, slow bull cycle," Yang Delong, chief economist at the Shenzhen-based First Seafront Fund Management Co, told the Global Times on Sunday.