Chinese mainland stock markets shouldn't be heavily challenged by the central bank's decision to again raise reserve requirements for commercial lenders, analysts said over the weekend.

Market insiders said the key stock index still has a big chance to break the 6,000 mark this week on a sustained capital influx. The upside may prove volatile, however, as a result of potential profit taking, they warned.

Market observers advised investors to proceed with caution in the near term and focus on sound corporate fundamentals.

The Shanghai Composite Index, which tracks yuan-denominated A shares and hard-currency B shares, rose 6.3 percent last week to close on Friday at 5,903.26 after touching an intraday high of 5959.36.

Turnover on the Shanghai Stock Exchange totaled 890.5 billion yuan (US$119 billion) for the five sessions, compared with 630.2 billion yuan the week before.

The reserve ratio - the amount of money a commercial bank must park at the central bank - will increase 0.5 percentage point on yuan deposits to 13 percent starting on October 25, the People's Bank of China said on Saturday. It is the eighth such jump this year and equals the ratio record set in 1988.

"The move was expected from the central bank to manage liquidity," said Liu Yu, an Orient Securities Co. "But its impact on the market will only be psychological and won't likely be large."

Analysts at Beijing Shoufang Investment Consulting Co said in a weekend note that the index is likely to conquer 6,000 territory early this week, buoyed by expectations of strong performance from heavyweights such as banks.

But the consulting agency warned that stocks may face big pressures after reaching new highs and investors shouldn't buy into companies without understanding their fundamentals in light of the sizzling valuations now dominating the market.

Other analysts echoed that view, adding that although the overall trend is still positive, uncertainties over government policies and the possibility of more tightening measures will probably lead to short-term corrections.

"The market should remain on the upside track in the second half, and sentiment is relatively fine," Liang Hui, a fund manager at ABN AMRO TEDA Fund Management Co, said at a Saturday investor forum held in Shanghai by the China Almanac of Investment Foundation For Security.

"But policy uncertainties are becoming bigger, which can result in market jitters and volatility." Liang advised investors to remain cool-headed and take a long view in buying stocks and mutual funds.

Economists and industry experts expect the central bank to lift interest rates again before the end of the year and continue to slow the pace of approving new funds in a bid to soak up the abundant liquidity that now exists.

"It's hard to predict how high the index can go in the near term as sentiment is hot," Gao Feng, a fund manager at China Southern Fund Management Co, said at the forum. "Anyway, investors should boost their risk awareness."

(Shanghai Daily October 15, 2007)