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Chinese households' newly-found interest in stocks and mutual funds is obviously fueled by the stunning performance of the domestic stock markets.

But policymakers should pay close attention to the long-term implications of the rising demand for more investment channels.

The latest survey by the People's Bank of China, the central bank, found that 40 percent of the 20,000 households surveyed said they favored stocks and mutual funds for investment. The proportion was 9.9 percentage points higher than in the first quarter of 2007.

It means that riskier stocks and mutual funds have overtaken bank deposits for the first time as the investments preferred by individuals.

This change tells a lot not only about China's stock boom but also the urgency to develop the country's financial markets.

Special coverage: Markets Watch Related readings:  Securities become residents' top investment option  Household deposits post biggest monthly drop  New mutual funds subscriptions hit record  China stock accounts top 100 million

Apparently, the lure of the market is irresistible. Chinese stocks have surged more than 50 percent so far this year on top of a 130-percent rise last year. That makes bank deposits increasingly less appealing, especially as rising inflation has sent the real interest rate into negative territory.

Under such circumstances, the Chinese authorities should regard the survey findings as a warning that the public needs more education about the risk of stock investment and more efforts to prevent an asset bubble.

From a long-term perspective, the change in individual preference to stock investments may indicate the coming of a new investment era.

As people's wealth grows and the population ages, Chinese households need diversified investment vehicles that allow them to better manage their money according to their different needs and tolerance of risk.

The current swing of household investment preferences to stocks and mutual funds has yet to be tested by the higher risk such investments ultimately carry.

The people's demand for diversified investment channels is huge enough for policymakers to accelerate domestic financial reform and innovation. Between the risk-free bank deposits and volatile stocks, a wide variety of financial products can be developed for individual investment.

Such a fully-fledged financial market system will help cool Chinese individuals' current frenzy for stocks and contribute to the country's long-term financial stability.