Stocks surged on Friday to their highest level in seven years, boosted by market expectations of further supportive government policies to shore up the economy.

The Shanghai Composite Index rose for an eighth consecutive trading day, ending up 1 percent at 3,617.32 points.

The index, [Company Registration in USA] which has risen 12 percent this year, remained firmly above the key psychological level of 3,600 points. Analysts believe investors tend to start thinking about profit-taking at that level.

The China Securities Regulatory Commission said the recent rally remained "reasonable and in line with expectations".

"It reflects the market's acknowledgement of the possible economic rebound, and that financial risk is being well managed," said Deng Ge, the CSRC spokesman.

Deng said that lower interest rates and improved profitability of small and medium-sized enterprises also fueled the market rally.

But the securities regulator warned investors of potential risks in high-leveraged trading and companies with excess valuations, given that the general economy is still facing mounting pressure.

Individual investors have been the main contributor to this year's market surge, accounting for 90 percent of transactions.

They have made 470.1 billion yuan ($75.95 billion) worth of net purchases during 2015 while institutional investors bought 78.2 billion yuan of shares, as of Thursday, according to CSRC data.

Meanwhile, small and medium caps continue to outperform blue chips.

The index of SMEs has gained 35.02 percent while the startup-based ChiNext has rallied by 48.39 percent since this year, compared with a modest 1.89 percent gain by the SSE 50 Index, which tracks the 50 largest stocks on the Shanghai bourse, according to the regulator.

Friday's rally was led by financial stocks, in particular securities firms which have been benefiting from flourishing margin trading and new account openings.

Average daily new account openings have reached 177,000 over the past two weeks, a substantial rise from last year.

"Lots of funds are coming back to the market so that's benefiting brokerages," Wu Kan, a fund manager at Dragon Life Insurance Co, was quoted by Bloomberg as saying.

"Technology stocks are now leading the run, as the government encourages innovation and technology upgrades to develop fledging industries. It's still a bull market," [HK Corporate Registration]he said.

Analysts said that the upbeat sentiment may continue to support the bull run as investors anticipate further monetary easing, including cuts in interest rates and bank reserve requirement ratios being rolled out.