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Wednesday, April 23, 2008

China's stock market plunge gives investors a taste of downside of capitalism

SHANGHAI: Retiree Guan Yuhuai plunged into stock trading for the very first time when prices were beginning to soar two years ago. Within a month, he doubled his investment, and he was hooked.

But with the market's recent plunge to half its October all-time high, Guan and millions of other Chinese investors are getting a rude introduction to the downside of capital markets.

``I thought I was pretty smart and bold to be good at stock trading,'' says Guan, a vigorous former steel engineer who seems a bit baffled by his reversal of fortune. ``But the more you bought, the deeper you're dug in.

``I'm sorry I didn't get out of the market when I was still making money, but now it's too late,'' he says. ``There's nothing to do but wait.''

Millions of individual Chinese investors dumped their savings into the stock market as the Shanghai Composite index soared 130 per cent in 2006 and 97 per cent in 2007.

But it has fallen sharply since hitting an all-time high of 6,124.04 in mid-October after regulators suspended sales of mutual funds to new subscribers, deflating what they feared was a bubble in stock prices. Repeated interest rate hikes and other tightening measures have also contributed to the decline.

Rules keeping China's share markets generally off-limits to foreign investors have insulated the mainland's two markets in Shanghai and Shenzhen from direct shocks due to the U.S. credit crisis. But uncertainties over the American economy _ a vital export market _ are taking a toll.

On Tuesday, stock prices sank to their lowest level in more than a year. On Wednesday, the Shanghai index was trading at 3,244.86 _ down nearly half from its peak.

Investors accustomed to China's command control economy are waiting for signs of government support for their ailing markets, but experts say they don't foresee a recovery any time soon.

``We need policymakers to do something to save the capital market,'' said Guan, the retired steelworker. ``But they're just holding meetings, talking and talking with no real action. Now the market is on the brink of a collapse.''

For most of last year, bank lobbies were crammed with savers waiting to shift their nest eggs into stock trading accounts. Many said they believed the government would not let share prices fall in the run-up to the Olympic Games, which begin Aug 8 in Beijing.

``I'm convinced that we individual investors have been sacrificed,'' said Maggie Shen, who quit her job as a flight attendent to become a day trader last October, just as the market was hitting its peak.

She read the daily financial newspapers, watched stock programs on TV and tried to learn as much as possible.

``I wanted to put all my energy into daily stock trading,'' Shen says. ``The market was making millionaires every day, and I thought this was my last chance to be a young, wealthy and successful person.''

She earned a return of 40 percent in the first five months, and lost it all in the following five weeks.

Alarmed by an 11 percent slide in the Shanghai index last week, late on Sunday night the China Securities Regulatory Commission announced new restrictions on sales of large blocks of shares newly freed from lockup periods.

That move, showcased in front-page headlines of state-run newspapers, was explicitly aimed at reassuring investors fretting over some 3 trillion yuan ($430 billion;euro273 billion) in previously nontraded shares due to enter the market this year.

But it did little to spur buying. ``Market boost digested in just one day,'' sighed a headline in the daily financial newspaper China Business News.

``The market is severely lacking in confidence,'' said an editorial in the 21st Century Business Herald.

The block trading rule ``certainly is a sign that the government wants to do something to keep the market from collapsing,'' said Qian Qiyun, an analyst at Shenyin & Wanguo Securities in Shanghai.

But he added, ``I think they'll need to do more, though. The market is full of pessimistic, badly injured people. It needs time and powerful policy medicine to cure it.''

Jittery investors are also well aware that the rule on block trades of newly released shares can easily be skirted by selling more but smaller blocks of shares, said Stephen Green, an economist for Standard Chartered Bank in Shanghai.

With inflation running at over 8 percent, authorities are unlikely to relax monetary policy _ the one thing that might actually rekindle buying sentiment, he says.

``We won't see that until inflation is squeezed out of the system. The economy in America is in recession and it's going to get worse,'' Green says. ``Looking at how things are going, there's no reason for optimism.''

Meanwhile, the losses are mounting. Chinese mutual funds, the main vehicle for individual investments, lost 647.5 billion yuan ($93 billion;euro59 billion) in the first quarter of this year, with combined assets under management falling to 2.5 trillion yuan ($357 billion;euro224.56 billion), the official News Agency reported Tuesday. It cited figures compiled from earnings reports by TX Investment Consulting, a local securities company.

Stocks that have been hit hard include PetroChina, a state-owned oil and gas giant that briefly became the world's first $1 trillion company after its initial public offering last autumn. By midday Wednesday, its shares were trading at 16.50 yuan, way below their trading debut peak of 43.96 yuan.

Like many Chinese investors, Chen _ the flight attendent turned day trader _ is philosophical about her bad luck.

``Fortunately I'm young and I have plenty of time to save more money,'' Shen said. ``In the worst case, I'll just get a job.''
 
 


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