The Hang Seng Index rallied to close above 25,000 for the first time since May 2008 yesterday, even as a top government forecaster warned that economic growth in 2014 would probably fail to hit 3 per cent.
Surging foreign fund inflows have driven the city's stock market higher as international investors ramp up exposure to mainland shares. The move reflects growing confidence that Beijing policymakers have halted a slowdown in the world's second-biggest economy.
Investors have also been buying stocks in anticipation of the start of the Shanghai-Hong Kong Stock Connect scheme, the so-called "through-train" programme to link the two markets and close a persistent valuation gap between mainland A-shares and H-shares listed here.
Consultants warn that the city's retail investors could get hurt if they begin to pile into the market fearing they will miss out on the next stage of a rally that has added 16 per cent to the value of the Hang Seng from the year's low in March, lifting it to 25,122.
The Shanghai Composite Index has also been trading higher, finishing yesterday at 2,245.33 points, its highest this year.
"It is reminiscent of the through-train story back in 2007, and upbeat market sentiments might be short-lived," Bright Smart Securities research manager Stanley Chik Yiu-fai said.
Chik's note of caution came as the government economist, Helen Chan, said the city's economy was "unlikely to grow at 3 per cent this year".
Chan's admission came just days after second-quarter data showed that the economy shrank 0.1 per cent from the first quarter, forcing the government to cut its official growth forecast for this year to between 2 per cent and 3 per cent from the previously predicted 3 per cent to 4 per cent.
Ahead of the data last week, top officials including Financial Secretary John Tsang Chun-wah and Hong Kong Monetary Authority chief Norman Chan Tak-lam had warned repeatedly of looming risks to the economy.
Domestic demand has taken a beating this year and retail sales have borne the brunt of the slowdown, with mainland shoppers scaling back purchases of luxury goods as a Beijing crackdown against corruption slows conspicuous consumption.
Former darlings during the retail boom such as jeweller Chow Tai Fook have seen shares sink by around 30 per cent this year.
Such declines have failed to overshadow optimism on mainland data that showed second-quarter GDP growth was back to Beijing's official target level of 7.5 per cent year on year, edging up from the first quarter's 18-month low of 7.4 per cent.
A series of policy easing measures, dubbed a "mini-stimulus" programme by private-sector economists, have been rolled out in recent months as the central government has sought to remove doubts about its commitment to stable growth.
Risks to the mainland economy remain substantial, say analysts who are concerned about the deteriorating outlook for the pivotal property sector. Slowing home sales have led economists at UBS to forecast 2015 GDP growth at just 6.8 per cent.
Kelvin Lau Gin-yip, a strategist at the Hong Kong branch of Bank of Communications, said steady stock market rises could stimulate consumption as people felt richer. "But a market soaring up like an arrow may not [bode well] or provide enough force to boost the economy."Topics: Hang Seng Index More on this: