THE Chinese stock market was the best performer among major emerging markets in the first quarter of 2007, even after its precipitous fall in late February.

The Dow Jones CBN 600 index, which reflects about 80 percent of China's free-float market capitalization, has gained 42 percent in the first three months of the year.

The Shanghai Composite Index, which tracks shares listed on the larger of China's two stock exchanges, has gained 19 percent as of Friday. The index rallied 130 percent last year, making it the star performer among major benchmarks in 2006.

On Feb. 27, the Shanghai Composite tumbled nearly almost 9 percent on fears that the Chinese Government would intervene to slow down the market.

"The stocks have since rebounded as people have recognized that growth in China continues to be strong and the outlook is quite bright," said David Riedel, president of Riedel Research Group. "I'd be cautious on stocks with very high valuations and any questions about value on the balance sheet."

Richard Gao, lead manager for the Matthews China fund, said: "It'll be quite a volatile market going forward. The domestic stock market is becoming more and more speculative and retail participation is tremendous. Valuations have gone up a lot."

"The story for China in the medium and long term is not one of exports, but one of domestic consumption," Riedel said.

 (SD-Agencies)