WHAT has really brought about the bull market? According to conventional wisdom, it all started when the United States Federal Reserve cut interest rates to zero in the wake of the dot-com crash-cum-recession in 2000. This in turn fuelled the surge of money flowing into private equity and hedge funds, as investors sought higher yields.

To justify their existence, the private equity and hedge funds poured their money into stocks, just as liquidity-awash economies started to turn around. The emergence of China, many analysts believe, will underpin the increases in the months - and even years - ahead.

In a nutshell, liquidity, momentum and China have been the main drivers of the current bull run.

In a July 5 report, for example, Credit Suisse set a new 12-month target of 4,200 for the Straits Times Index. Apart from citing a strong economy, the key reasons were liquidity (partly from property en-bloc sales), low interest rates and private equity flows which, for Asia Pacific ex-Japan, reached US$7.6 billion in 2006.

Pointing to takeovers of semiconductor firm Utac and hard disk drive maker MMI, Credit Suisse said it expects an escalation of merger and acquisition activity over the next couple of years, 'driven by record fund-raisings at buyout firms and a benign interest rate environment'.

It added that global M&A boom appears to be still at an early stage, with most transactions funded by cash, unlike the all-share deals of the Internet bubble years. However, the foreign house said the local market is vulnerable to a short-term pullback because of the sharp run-up of the past year.

'It is also entering the third quarter which is seasonally marked by higher volatility and weakness in global markets. We think any near-term correction is likely to be triggered by a rise in risk aversion to external factors such as resurgent subprime mortgage concerns in the US,' said Credit Suisse.

So there's plenty of money in the system and an abundance of deals to keep interest ticking over in stocks. Thanks to these reasons, prices have been supported, the momentum has been upward, and this in turn has lent confidence to analysts to continually upgrade their forecasts. The main threat, it appears, is a blowout on Wall Street. To this should be added the behaviour of the average China investor.

Earlier this year, an almost 20 per cent blowout in China rattled global stock markets, triggering a huge sell off on Wall Street. However, because China prices quickly stabilised and because every large drop there since then has been swiftly followed by a bounce, China's market today doesn't figure as a major problem area.

In between the bounces, analysts were confident to find reasons to justify China's sky-high valuations - according to Bloomberg, the Shanghai Composite sells for a price-earnings ratio of 40 times, with less than one per cent dividend yield, while Shenzhen's PE is 60 times with an even smaller dividend yield - such as capital restrictions on the public that essentially force it to invest in domestic stocks.

The upshot of all this is because China hasn't suffered a sustained crash - observers have become conditioned to believing that it won't, and have found reasons to justify why it shouldn't. Complacency has set in and nobody really mentions China as a risk factor.

However, it would be prudent to take heed of the warning signs from China. If it was the average US consumer who drove stock markets earlier this decade (before that it was Nasdaq), it is now the behaviour of the average China investor which determines how markets fare - and this should be seen as magnifying, not reducing, risks.

The market there now regularly undergoes 5 per cent rises and falls daily - which often spills over to the rest of the region - and to place too much faith on the greed and propensity to keep buying among China's great unwashed may not be as advisable, as investors have been led to believe.