Lin Weijun, a taxi driver in Shanghai, has come up trumps in China’s stock market after suffering years of losses.

He said he has had more than a 70 percent return on his stock investments this year, outperforming a 25 percent rise in the Shanghai Composite Index.

“It was quite an unexpected turnaround,” Lin said.

China’s stock market has set a blistering pace since the second half of last year, fueled by a surprise rate cut by the People’s Bank of China and by optimism over the new stock market trading link between Shanghai and Hong Kong exchanges.

Last Wednesday, the Shanghai index climbed above 4,000 points, a key technical resistance level, for the first time since early 2008. It has racked up a world-beating gain of 67 percent since last November.

Lin is one of the legions of individual investors who form the backbone of the Chinese stock markets. He first began investing in 2008 when he bought several blue chip stocks in banking, property and steel. He was taking a punt on long-term growth potential.

However, in the following year, he sat back in gloom as the benchmark index lost more than 60 percent in the space of a few months. Prolonged weakness followed, dashing Lin’s hopes of ever recovering his losses.

He left his portfolio dormant for years, until last October, when a bull market began stirring.

The stunning rebound that ensued has been a magnet for retail investors to re-enter the market.

They now account for 90 percent of trading activity on mainland stock markets, according to the China Securities Regulatory Commission.

The number of newly opened stock accounts soared to a record 1.67 million during the week ended March 27, five times the average of the past year, according to data from the China Securities Depository & Clearing Co.

A survey by the Chengdu-based Southwestern University of Finance and Economics found that more than two-thirds of new investors have never finished high school.

Educational background isn’t necessarily an obstacle for inexperienced investors to make a killing on stocks.

Lin, who admits he’s unschooled in investment techniques, monitors stock market movements during breaks in his taxi driving.

His strategy is pretty straightforward: chase bargains.

When he resumed trading last year, Lin started snapping up “penny stocks” trading below 5 yuan (81 US cents) per share.

Others did the same. Penny stocks are hardly trading at pennies anymore. As of last Thursday, the number of shares priced at below 5 yuan dropped to 21 from 400 last June. Shares trading at 2 yuan have disappeared altogether on the Shanghai and Shenzhen exchanges.

In one case, Shandong Iron & Steel Co shares soared more than 60 percent from a low of 2.58 yuan in February even through the steelmaker has warned it may post a net loss of 1.35 billion yuan in 2014.

“The bull market has entered a stage driven by speculative money from retail investors who prefer low-priced shares and tend to ignore fundamentals,” said Xun Yugen, chief equity strategist with Haitong Securities.

The bull run flies in the face of overwhelming weakness in the China economy, which expanded at its slowest pace in 24 years in 2014.

“With no significant change in China’s economic or corporate fundamentals, the visible rebound in China’s A-share market since November appears to have been largely liquidity driven,” UBS Securities said in a report. “It has been fuelled by a number of factors, including new funds flowing into the stock market from household savings, real estate, commodities and trust institutions.”

The momentum has been further fueled by margin trading, which allows investors to buy shares with borrowed money.

The outstanding balance of margin trading stood at a record high of 1.51 trillion yuan on the Shanghai and Shenzhen bourses on April 1, a 48 percent surge from the end of last year, data from the exchanges showed.

A “self-feeding speculative frenzy,” BNP Paribas called it.

“Margin purchases are now accounting for almost 20 percent of equities daily turnover, which itself has soared to unprecedented levels,” the French bank said in a note. “What happens next is clearly an ‘unknown-unknown’.”

In contrast to domestic enthusiasm, foreign funds are holding back from the red-hot Chinese markets.

Offshore A-share exchange traded funds saw a net outflow of US$590 million in the week ended April 3, the fifth consecutive week of capital outflows, China International Capital Corporation said in a report, citing data from fund flow data provider EPFR Global.

Net outflow

The new Hong Kong-Shanghai Connect link that allows overseas investors to trade in Shanghai-listed shares also recorded net outflows on three days last week, according to data from the Hong Kong Exchanges & Clearing Ltd.

Still, most analysts remain optimistic about the market outlook.

UBS said it expects more stimulus measures to bolster economic growth and optimism in the second quarter.

For one thing, it’s widely expected China will step up policy easing this year by cutting interest rates and the bank reserve requirement ratio to lower funding costs and ensure a stable economic environment for structural reforms.

Meanwhile, the launch of the new stock link between the Shenzhen and Hong Kong bourses in the second half of last year is expected to further widen access for foreign funds, raising the possibility of China’s yuan-denominated A shares being added to MSCI Inc’s widely traded emerging market index.

UBS estimated that at least 1.3 trillion yuan of funds will continue to flow into mainland stock markets, representing 7.4 percent of the total free-float capitalization of the A-share market as of March 20.

However, there are warning bells that the bull run may be overdone and a correction is becoming more likely.

“It’s getting riskier,” Li Daxiao, chief economist with Yingda Securities, wrote on his microblog. “The price-earnings ratios of 43 percent of stocks on the Shanghai and Shenzhen exchanges have exceeded 100.”

Analysts with HSBC Jintrust Fund Management Co said pending first-quarter economic data and corporate profit reports may shift investor attention back to fundamentals, weighing on the market.

Lin doesn’t plan on getting his fingers burnt again. He said he has started scaling back his stock holdings to lock in gains.

“The market may be at a crossroads,” he said. “I think it’s wise to play it safe for a while.”