Playing the Market in the People's Republic Chinese Investors Fear Burst of Stock Bubble

In recent months millions of Chinese have gone crazy about stocks, driving up prices to record levels. Now the government is trying to dampen the stock market fever and prevent a crash at the same time -- but what happens if the bubble bursts?

By in Shanghai


An investor looks at an electronic board at a stock exchange market in Shanghai. Many Chinese people have put their savings into stocks.
REUTERS

An investor looks at an electronic board at a stock exchange market in Shanghai. Many Chinese people have put their savings into stocks.

Chinese Premier Wen Jiabao, 64, likes to come across as being concerned about harmony in the People's Republic. Wherever the flipside of the country's economic boom causes dissatisfaction, the friendly communist leader hurries to the scene and comforts those who have lost out. He embraces the urban poor, listens to the concerns of farmers and consoles customers in supermarkets when the price of pork rises too quickly.

The premier could just as well demonstrate his concern for the people's woes by paying a visit to China's shareholders at one of the country's more than 3,000 stock markets. They have become scenes of sheer outrage -- and anger directed against the state. Millions of Chinese small investors are worried about their savings, now that Beijing has taken steps to cool down a stock market fever that has gripped the country.

It was a risky move on the government's part. It tripled the tax on stock transaction to 0.3 percent, triggering massive drops in the price of some stocks. The approach worked, at least initially. A major crash failed to materialize, and the market had even recovered somewhat by last Friday.

Nevertheless, the incident was a reminder to the world, once again, of the risks that come with China's rapid growth -- for investors and for the communist leadership.

It also prompted growing worries on the global financial markets over what would happen if the Chinese stock market bubble were to burst. The world's financial markets are more closely interlinked than ever before, so that disturbances in one location can quickly spread to all markets.

Stock prices around the globe have been rising almost unstoppably in recent months and years, propelled by the boom in the world economy.

China's stock market has been overheating recently.
DER SPIEGEL

China's stock market has been overheating recently.

For the first time since 2000, the German DAX stock market index at the beginning of June crossed the 8,000-point threshold -- albeit only briefly -- and many experts believe that it is only a matter of time before it permanently surpasses the record high it reached in 2000. Back then, euphoria was followed by disillusionment and a sense that prices had strayed too far from reality. The subsequent decline was unavoidable -- and painful.

As prices rise today, so does nervousness in the market. Many observers wonder whether a bubble is developing in the market, just as it did in the days of the New Economy. Has the Internet dream of days gone by simply been replaced by today's globalization fantasy? And by unrealistic expectations for global growth in general and, more specifically, growth in the emerging economies -- first and foremost China?

In no country has market fever been as rampant in recent months as in China. Its excesses can be seen every day at branches of brokerage houses, such as the Northeast Securities office on Yongjia Street in Shanghai on Monday of last week.

Gambling Their Savings Away

The market doesn't open for another 30 minutes, but people are already jostling for the yellow plastic chairs in front of the panel that displays stock prices. People are shouting to make themselves heard, swapping predictions and trading tips. The excitement is palpable, and the place almost feels like a casino.

Then the market finally opens and the prices flicker on the screen -- almost all in green, which means that stock prices are falling. A collective groan moves through the rows of chairs, and the noise level rises to an angry crescendo. Almost everyone has something to curse about, because almost everyone is losing money. On this day alone, the Shanghai Stock Exchange will plunge 8.3 percent.

Huang, a retiree, throws up her hands in horror. She has invested about 100,000 yuan, most of it in real estate stocks. She doesn't know what to do. Should she sell quickly and rescue at least some of her assets? The man sitting next to her, someone everyone here calls Uncle Li, advises Huang to be patient. "The Olympics are next year," he says. "Beijing will not allow a crash to happen."

A woman who sold off her stock earlier looks stunned as she monitors the action on the board. She began investing in stocks in May, when the Shanghai Stock Index jumped to 4300. She invested a fifth of her savings in especially unstable, low-priced stocks, because the blue chip stocks were already too expensive.

But the cheaper stocks were among the biggest losers in the recent decline, which came on the heels of constant, steep growth, mirroring the unrelenting growth the Chinese economy has experienced for years. The market has risen by about 130 percent in the last 12 months, and since the beginning of the boom in mid-2005, its value has even quadrupled.

In some weeks the Chinese were opening more than a million new stock accounts a week, with many new investors withdrawing their savings from banks to buy securities. Other investors even took out second mortgages on their homes to be able to play the market game. In Shanghai, professors warned their speculation-hungry students not to forget their studies. Domestic servants quit their jobs, lured by the promise of fast money and the hope of striking it rich on the stock market.

The Internet, with its constant barrage of stock tips and commentary by supposed experts, only inflated the speculative bubble even further. The Web is also the venue of choice for frustrated investors seeking to vent their anger against the "traitors" in Beijing. "Premier, take a look at the Internet, your people are bleeding!" a frustrated stock market investor complained on Guba, an investment Web site. Another user wrote: "No justice, no fairness -- how can this be called rational?"

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