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SHANGHAI, March 20 (Reuters) - China stocks powered higher on Friday, posting their biggest weekly gain in three months and hitting fresh seven-year highs, as investors speculated that Beijing will soon unveil fresh stimulus measures to aid a flagging economy.
China's key stock indexes, the CSI300 index and the Shanghai Composite Index were both up about 1 percent in heavy trading, taking their gains for the week to over 7 percent to stand well above psychological resistance levels.
Analysts warned of risky volatility, however, as leveraged buying rose to record highs and valuations of small-cap stocks surged.
"It is a bubbly level not seen since the heydays of 4-trillion yuan stimulus," Hong Hao, Hong Kong-based strategist at BOCOM International said in a note to clients on Friday, referring to the massive economic stimulus programme unveiled during the global financial crisis.
"Could we have learned from the past experience during the bubble years of 2007 and 2009? Could this time be different? Academic evidence appears unfavourable in this regard," Hong said, warning investors of "surging volatility."
China's securities regulator, however, struck a balanced note on Friday when commenting on potential risks.
Deng Ke, spokesman of the China Securities Regulatory Commission (CSRC), told a press conference in Beijing that the recent market rally is "rational", but urged investors not to blindly speculate on stocks.
The regulator announced the launch of two new stock index futures products, providing investors with more risk-hedging instruments.
This week's rally was fuelled by Premier Li Keqiang's remarks on Sunday, which signalled the government has more stimulus tools and will use them if the economy continues to slide.
Wu Kan, head of equity trading at investment firm Shanshan Finance in Shanghai believed stock prices will go up further, and corrections, if any, won't be deep, "because money keeps flowing in."
Outstanding deposits in securities trading accounts totalled 1.78 trillion yuan ($287.81 billion) by the end of last week, the highest since data became available in 2012.
And the outstanding amount of margin financing, or money investors borrow to buy stocks, rose to a record high of 1.3 trillion yuan.
Signs of resurgent trading volumes and margin financing, as well as further monetary easing, would benefit brokerages, analysts said.
Brokerages including CITIC Securities, China Merchants Securities and Western Securities all jumped more than 8 percent on Friday, lifting the CSI300 Financials subindex up nearly 3 percent. (Reporting by Samuel Shen and Pete Sweeney; Editing by Simon Cameron-Moore)