Aug. 5 (Bloomberg) -- China’s benchmark stock index, the world’s second-best performer this year, may extend gains as earnings recover and economic growth accelerates, Harvest Fund Management Co. said.

“I don’t think we’re in a bubble,” said Chen Li, Beijing- based strategist at Harvest, part-owned by Deutsche Bank AG and which oversees about $22 billion, including a portion of the national pension fund. “This is a recovery story that is one of the strongest and most convincing in the world.”

The Shanghai Composite Index has doubled from its November low and investors last week opened the most trading accounts since January 2008, enticed by signs a 4 trillion yuan ($586 billion) stimulus package and record bank lending have revived the economy. The gains have sparked concern the government may act to slow the rebound.

The government needs to be careful that state spending doesn’t fuel a “bubble” in the stock market, Allan Conway, head of emerging-market equities at Schroder Investment Management, which oversees $17.5 billion, said in a telephone interview from London yesterday. Conway said he will remain “overweight” in Chinese stocks on optimism that rising domestic demand and the stimulus will lift growth to the government’s 8 percent target.

China’s manufacturing expanded in July for a fifth month, according to an official gauge. New loans tripled in the first half from a year earlier after the government eased restrictions.

“We’re still quite optimistic about prospects for the stock market,” Chen said in a phone interview yesterday. Harvest is among the companies that help to manage the country’s state pension fund.

Valuations

Valuations of stocks on the Shanghai Composite Index have surged to 38 times earnings, more than twice those of the MSCI Emerging Markets Index and the Standard & Poor’s 500 Index.

The stock market revival has triggered an end to a nine- month moratorium on domestic IPOs in June. The five companies that went public since then gained an average 112 percent on their first day of trading, even after selling stock at the top end of ranges marketed to investors. Shares worth 55.6 billion yuan have been sold so far this year, according to data compiled by Bloomberg.

The country’s gross domestic product grew 7.9 percent in the second quarter, becoming the first of the major economies to rebound from the global recession. Chinese companies will post a 17 percent increase in earnings this year and 19 percent next year, Chen said, citing “consensus estimates.”

The outlook is “more certain for the moment” than for peers such as India because of the Chinese government’s stimulus spending, Christopher Ryan, managing director in Asia for Fidelity International Ltd., said Aug. 3.

‘Look Stretched’

Still, there are signs the government will act to ensure bank loans aren’t diverted into the stock market. The banking regulator told lenders on July 27 to ensure loans intended for investment in fixed assets go to projects that support the real economy. Three days later, the regulator announced plans to tighten rules on working capital loans.

Former Morgan Stanley chief Asian economist Andy Xie, now an independent economist, said July 31 China may cut growth in new loans by half in the last six months of this year to deflate a stock-market bubble.

Edward Chancellor, a Boston-based portfolio manager at Grantham Mayo Van Otterloo, said July 31 the recovery in the Chinese stock market is “a classic bubble echo.” Emerging- market stock valuations “look stretched” and developing nations may be headed for a “profit-taking driven correction,” RBC Capital Markets said in a note to clients.

The Shanghai index has rallied 90 percent this year, the world’s second-best performer after Peru among 89 equity benchmark measures tracked by Bloomberg.

Loose Policy

Harvest’s Chen said the Chinese government is likely to maintain a “moderately loose” monetary policy. The authorities won’t raise interest rates or order banks to set aside a larger amount of reserves as the economy isn’t showing signs of overheating, he added.

Coal producers and property developers are among the best bets in the Chinese market as they will benefit from a rebound in economic growth, said Chen, who left UBS AG as Shanghai-based China equity strategist to join Harvest on June 1.

Chen on March 20 advised investors to buy developers and makers of large home appliances, saying the industries would benefit from rising real-estate transaction volume. A measure of property shares on the Shanghai Composite Index has rallied 57 percent since then, the most among five industry groups.