Stock Mania with Chinese Characteristics -- Stock market fever grows in
China

International Herald Tribune
Stock market fever grows in China

By Jim Yardley
Friday, January 26, 2007

BEIJING: There is no exact Chinese translation for "irrational
exuberance," but no explanation seemed necessary in the bustling lobby
of GF Securities: Grungy-looking college students, office workers,
retirees and even a pregnant woman in suede boots all jostled into the
brokerage, eager to buy stocks and buy them now.

Wang Yu, 20, slouching on a black sofa in the lobby, had already doubled
his initial investment of 100,000 yuan, or about $12,900, after jumping
into the Chinese stock market barely a year ago. His parents had lent
him the start-up money but now he was feeling confident and mulling a
new investment. Commercial shipping containers, he predicted, could
bring big profits.

"A lot of the older investors lost a lot of money, so they are not as
optimistic," Wang said. "I think it is going just fine."

China's stock markets are almost going mad, actually, with the leading
Shanghai market at nearly 3,000, as ordinary Chinese flock to buy
equities in breathless, record numbers. The bull market is so dramatic ―
the Shanghai index hit a record high this week before falling back
slightly ― that one senior Chinese official has warned against "blind
optimism."

College students, yuppies, retirees and others are buying individual
shares or investing in China's swelling mutual funds. Day trading is
common since most investors use home computers.

The run-up is particularly striking because China's stock markets have
historically been stagnant financial backwaters, marred by scandal, weak
oversight and fundamental contradictions. Even as China's economy has
roared, stocks have rarely taken off, partly because of flaws that
allowed murky, state-owned companies to use the market as a tool to
raise money without real oversight or accountability. Public confidence
was almost nonexistent.

No one is arguing that Chinese markets are now fundamentally reformed.

But enough changes have occurred to inspire new confidence. At the same
time, government efforts to cool down the bubbly national real estate
market have made stocks a logical place for Chinese investors to park
their money.

Roughly 2.7 million new investment accounts were registered last year,
more than triple the number from 2005. The result is an almost goofy
buying binge that many analysts expect to continue.

"We've gone from a historic low to a historic high in the space of a
year," said Stephen Green, senior economist with Standard Chartered Bank
in Shanghai, who specializes in China's equities markets. "Obviously,
everyone is getting a bit scared about the scale of the ramp-up." The
Communist Party is one concerned bystander.

Some analysts says the market may already be overvalued and peaking.

The leading Shanghai market is still less than two years removed from
lows that dipped below 1,000. It finished Friday at 2,882.56 points, up
0.88 percent from its close Thursday. It hit a record of 2,933.19 at the
start of the week.

In the past, angry public protests have erupted over market malfeasance,
and the possibility of a new downturn sinking millions of new Chinese
investors is a concern for a ruling party that prizes social stability
and is preparing to install a new generation of leaders at a crucial
party meeting this fall. In late December, Cheng Siwei, a vice chairman
of the National People's Congress, the party-controlled legislature,
warned against "blind optimism" in the bull market.

For now, though, public excitement is outweighing anxiety. Friday
morning, a news report on CCTV state television featured a cluster of
elderly investors in Shanghai, clamoring about the profits to be made
trading stocks. In Shanghai, a local program, "Stock Market Today," is
getting some of the highest ratings in the city.

The popular publication Southern Weekend ran a long article describing
how people were pulling their money out of real estate to put into stocks.

Mutual fund managers were receiving bonuses of 5 million yuan, or about
$645,000, a staggering sum in China and even more surprising considering
that many financial firms were near ruin only a few years ago.

"When I go to the beauty salon, the girls who give me a manicure are
even talking about stocks," said Shirley Lei, a consultant in Shanghai
who worries that inexperienced buyers could get cheated. "They ask me,
'What should I invest in?' They say they are doing research."

At brokerages in the major southern cities of Guangzhou and Shenzhen,
the atmosphere this month at times felt like a carnival.

Inside a branch of Guosen Securities in Guangzhou, the firm had
installed additional computer terminals in the landing of a stairwell to
help accommodate crowds of investors tracking their investments. Other
investors stared at a wall of computer screens: retirees, a few men in
dark suits, people clutching their lunch in flimsy bags.

"You can probably see from the smiles on their faces that the situation
is good," said Yang Sukun, a Guosen employee.

In Shenzhen, Guosen's main trading office had opened a second
registration counter to handle the daily overflow of new customers. Yang
Junming, an account manager, said about 70 percent of clients did not
even come to the office but use company software to trade from home.

"At the moment, there are not many investment opportunities for people
inside China," Yang said, noting that young people made up a high
percentage of new investors. "For a while, it was real estate. But the
improvement of the market's structure is now encouraging people to buy
stocks."

China's markets nearly disintegrated in 2005 as scandal and structural
problems sank the Shanghai composite index. Two years earlier, a poll
found that 90 percent of investors had lost money. Public confidence was
so low that half of these investors said they wanted to sell their
holdings and abandon the market forever. False accounting was considered
rampant, and massive state- owned companies were allowed to list without
truly going private by keeping huge numbers of non-tradable shares.

"You gave these murky companies a ton of money when they did their
IPOs," Green, the bank economist, said of initial public offerings of
stock. "And then behold, a lot of money disappeared."

But since early last year, the market has risen rapidly, partly because
many state-owned companies settled on formulas to begin cleaning up the
problems of non-tradable shares. Analysts say reform is still needed to
insure the long-term health of the markets. And the markets still
represent a small piece of the national economy.

But the optimism is contagious. At GF Securities in Beijing, Zhang Jie,
manager of client services, said his office registered only about six
new clients a week during in 2004. Last month, he averaged 120 new
accounts a week.

Zhang once made a point to avoid discussing the market when he called
clients, instead asking about their hobbies. "I'd talk about horses or
we'd chat about golf or about tea," he recalled.

Now, he added, "the numbers of people trading in a single day are the
same as we had over two weeks when the market was low in 2005."

Out in the lobby, Lu Chao, 24, wore a fashionable leather jacket and
helped a friend register to trade. Lu is a day trader who shares a home
computer with his mother, another day trader. He said his investments
were up 170 percent since July 2005. He researches companies on the
Internet and says he and his mother do not always agree on where to put
their money. But they are both confident about the future.

"Of course, the market in China is not as regulated as in America or
Britain," Lu said. "The Chinese market is much younger, so you are going
to have risk. But I think the government is trying to straighten things
out so that the market will become stronger."

His goal was simple. "I want to get rich," he said.