The stronger-than-expected rebound of the Chinese stock market in the past couple of months has understandably raised the hopes and fired the imagination of the army of depressed investors and cash-strapped enterprises in the property and other sectors.

Since December, the benchmark Shanghai Composite Index has risen almost 18 percent, despite occasionally faltering, to 2,328.22 on Jan 21, touching a high of 2,332.78 on Jan 15. This market performance, seen as the strongest in about 48 months, has stirred a wave of exuberance in the stock analyst community, as if their fervent praying for the return of the bull for so long has been finally answered.

The stock market rally has also provided the much-awaited opportunity for the many thousands of more practical investors to unload at least part of their holdings to reduce the accumulated paper loss that has tormented them for the past several years. More than 500,000 investment account holders with various stockbrokerages have reportedly sold all their share holdings within the past month.

But that apparently hasn't seemed to dampen the market's festive spirit. The number of publicly traded companies, big and small, joining the queue to raise funds in the stock market by issuing new shares is rising. In addition, the regulatory agency has reportedly lifted the restriction on enterprises seeking a stock market listing.

Indeed, many Chinese enterprises are eagerly hoping that a sustained stock market rally can help ease the financial strain brought about by excessive borrowings from banks to finance growth while equity funding was largely choked off by the prolonged slump. Aggregate corporate debt has already exceeded 110 percent of GDP, compared to the 90 percent ratio that is widely considered to be the upper limit within the margin of safety, according to Yin Zhongli, a senior researcher at the Chinese Academy of Social Sciences.

For that reason, room for further leveraging by enterprises for expansion is extremely confined, Yin wrote in his micro blog. What's more, he wrote, any large-scale program to fuel economic growth with easy credit could backfire badly on the economy as a whole.

Under such circumstances, "it is hard to understate the importance of a healthy stock market to the economy in general and the corporate sector in particular," he said.

But even the most optimistic analyst is asking how long the rally is going to last. As one investor mused in his blog: Are we really seeing the return of a bull market or is it just a mirage?

To answer this question, it is important to ascertain if the Chinese stock market is as undervalued as some analysts have suggested. It was a lot easier to answer this in November last year when it was made known that some foreign institutional investors had been quietly rebuilding their portfolios of mainland stocks. Apparently, these savvy investors were convinced that stocks of some major Chinese companies were selling at bargain-basement prices. At that time, the average market price to earnings ratio was 10.7 times. Now, the ratio has climbed to 12.57 times.

The news of their purchases has been widely credited with helping to launch the latest rally. But foreign investors' enthusiasm is nothing more than a psychological boost because the inflow of overseas investment under the Qualified Foreign Institutional Investor program has remained small relative to the size of the market. Domestic investors must decide if there is still life left in the process of stock revaluation.

That decision will depend almost entirely on the earnings potential of the publicly traded companies. Only when investors are convinced that the major publicly listed companies can maintain growth in quality income rather than acquiring new assets to boost revenue will they believe that a market revaluation is justified.

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