After a turbulent third quarter, Chinese stock markets have snagged substantial gains since the start of October, with the benchmark Shanghai Composite Index climbing over 10 per cent on buoyant hopes for further stimulus and reform measures from Beijing by the end of the year. But experts caution that deteriorating corporate earnings, the fundamentals of stock markets, and lingering uncertainty over the timing of an interest rate increase by the US Fed may pose serious risks to the markets’ ability to sustain its advance. Investor sentiment has clearly improved in the past month Yuliang Chang and Joseph Huo, strategists for Deutshce Bank Mainland China’s benchmark Shanghai Composite Index has rallied 11 per cent in the first seven trading sessions of October, closing at 3,391.35 on Friday. The index headed higher on Monday morning after China recorded a better-than-expected 6.9 per cent GDP growth in the third quarter. Its performance in the third quarter saw the index plunge 29 per cent to close at 3,052.78 on September 30, marking its worst quarterly decline since 2008, dragged south by fears over China’s economic slowdown and the Fed’s tightening cycle. The Shenzhen Composite Index had also jumped since it resumed trading on Oct. 8 after the week-long National Day holiday, up 15 per cent from its Sept. 30 close of 1,716.78. In Hong Kong, the Hang Seng Index also rallied more than 10 per cent since the end of September when it settled at 20,846.30. On Friday, the index finished at 23,178.14 . “Investor sentiment has clearly improved in the past month,” Yuliang Chang and Joseph Huo, strategists for Deutshce Bank, said in a recent research report, citing “strengthening pro-growth policy tone and mounting fiscal and property stimulus measures” from China. Despite the better than expected economic numbers released on Monday, investors still seem to continue supporting the idea that there will be another wave of stimulus by the end of the year, Gerry Alfonso, an analyst for Shanghai-based Shenwan Hongyuan Securities, said. In a move to increase lending support, the People’s Bank of China recently announced it would expand a trial re-lending programme, which lets banks use loans as collateral to borrow from the central bank. Previously, the central bank cut the down payment requirement for first home buyers to stimulate housing demand amid a sluggish property market. In addition, the top leadership of the Communist Party was scheduled to hold a four-day plenary meeting on October 26 and discuss the 13th Five Year Plan, China’s economic and social development blueprint for the next five years. “There have been some rallies based on expectations for state-owned enterprise reform, particularly as the 13th Five-Year Plan comes together,” said Angus Nicholson, an analyst for IG Group. As investors’ risk appetite has increased, the Chinese authorities may be easing “grey market financing”, with outstanding margin financing gaining nearly 6 per cent since the start of this month, he noted. Top gainers in the Chinese markets last week include IT, clean energy, and some state-owned shipbuilding companies as investors perceived those sectors as potential beneficiaries from state-owned enterprise reforms and upcoming development plans for the 2016-2010 period. However, some experts doubt policy expectations may keep the rally going as the headwinds on the economy shows no sign of easing. “It remains a question whether China can jump-start its economy in the fourth quarter to reach its 7 per cent annual growth target despite the fact we may have entered a ‘policy honeymoon’ for the markets, “ Shaoyu, Zou Hui, and Wu Shengchun, analysts for Shanghai-based Orient Securities, said in a recent report. He warned that progress on China’s reforms in state-owned enterprises and the financial sector may be “sluggish”, as those measures have entered a “critical stage”, implying the difficulties for decision-makers to tackle complex vested interests who may resist or delay those reforms. Even if markets saw a temporary rebound ahead, it might not be driven by fundamentals, as Chinese companies’ earnings are still “deteriorating”, the report said in citing a recent forecast by the International Monetary Fund that China’s economic growth may further slow to 6.3 per cent next year. Volatility in Chinese markets is worrisome. The analysts point to a number of risks from lower-than-expected corporate results in the third quarter, more signs of a weakening economy in the coming months, to disappointment over reform plans and the Fed eventually boosting rates. Analysts from Macquarie Capital Securities said capital outflows also pose another threat to the Chinese economy, as the foreign exchange purchases by Chinese banks fell by 761 billion yuan last month, after dropping 724 billion yuan in August. “This is a real risk,” Larry Hu and Jerry Peng said in a report on Monday, noting that capital outflows could cause liquidity tightness, if the PBOC fails to inject enough liquidity back into the system. Nevertheless, experts from HSBC appear to be more bullish looking forward, suggesting overweight for Chinese equities listed in Hong Kong. “We look for a China relief rally into year end,” HSBC strategists predicted in a report earlier this month, as they expected that more “decisive easing” from Beijing would support a moderate growth rebound. The bank forecast China’s economy to expand 7.1 per cent this year, and grow by a 7.2 per cent for 2017.