Investors in China shrug off big drop

By Don Lee

May 31, 2007 12 AM PT

Times Staff Writer

SHANGHAI — China’s highflying stock market suffered its biggest one-day drop in three months after the central government took action to cool speculation, but the enthusiasm of many of the country’s ordinary investors remained undiminished.

“I’m still very confident,” said Sunny Xia, a 23-year-old student at Jiaotong University in Shanghai. Xia lost about $1,300 on paper Wednesday, when a key Chinese stock index tumbled 6.5%. But he still was up 50% on the original $13,000 investment he made in December.

“Almost all my friends around me are playing stocks,” said the financial engineering major, who is managing his family’s savings.

Unlike in February, when a plunge in Chinese shares dragged down stocks worldwide, most markets in other countries showed relatively little reaction Wednesday. On Wall Street, in fact, many stock indexes including the Dow Jones industrials and the Standard & Poor’s 500 set closing highs.

Chinese stocks, however, extended their declines this morning, opening sharply lower in Shanghai before rebounding and ending the morning session down 1.1%.

“The fact that the index came back shows that the atmosphere of speculation is too strong,” said Zuo Xiaolei, chief economist at China Galaxy Securities Co. in Beijing.

Key indexes in Japan, Hong Kong and South Korea moved higher early today.

Wednesday’s slide was triggered by Beijing’s decision to triple its tax on stock trades. Analysts said they expected the government, amid fears that a market crash would hammer the economy and spread worldwide, to take even stronger steps to curb the speculative fever.

The Shanghai market’s drop Wednesday was its second-biggest this year, after its 8.8% loss Feb. 27 helped trigger a short-lived global stock sell-off and awakened investors to China’s rising influence in world financial markets.

Analysts say the government’s increase in the so-called stamp duty on stock trades might have a temporarily chilling effect on traders but by itself was unlikely to cool the market much in coming months.

The higher stamp tax raises the cost of transactions to $3 for every $1,000 worth of shares traded, not including the 0.8% broker commission fee. But that’s peanuts to investors when stocks are soaring 10% a month, with many small-company issues rising at double that pace.

The Shanghai composite index is up 52% this year despite Wednesday’s loss. The index rocketed 130% last year.

The Shenzhen market’s composite index is up 118% this year after soaring 97% last year. By contrast, the Dow is up 9.4% this year. The average European blue-chip stock is up 7.2%.

Government officials worry that many ordinary citizens are betting wildly and risking everything on companies whose fundamentals they know little about. Contributing to that frenzy are dealers who, analysts say, collude with companies to boost trading activity and push prices higher.

The surge has increased concerns of a Chinese stock market bubble, as even outsiders such as former U.S. Federal Reserve Chairman Alan Greenspan have warned of a steep decline ahead.

Yet many Chinese have ignored such warnings and rushed to open trading accounts. Stories abound of people caught up in the stock craze, with investors hocking their homes and even resorting to crime to support their stock purchases.

The number of Chinese brokerage accounts exceeded 100 million for the first time earlier this week, after a record 455,111 accounts opened Monday.

As the market dived Wednesday, investors followed the action inside packed trading halls and on college campuses, where a growing number of students have jumped into the market.

Some 200 investors jammed into a small hall at Tiantong Securities’ brokerage in central Shanghai, one of scores of trading parlors dotting the city. Inside, the air was hot and thick. There was a constant din of boisterous chatter. People scrambled to banks of computer stations, sliding their cards into a reader before checking and trading shares. Most others sat numbly staring for hours at electronic tote boards all around them that flashed yellow and red numbers.

One woman, a 60-year-old named Yao, could barely contain herself.

“I am terribly angry. I feel choked in my chest,” she said, adding that she lost more than $9,000 on Wednesday. Only a few days ago, Yao said, a government official squelched rumors of a stamp tax increase. “How could the government change so fast? How can I trust the government?” she said.

Yet even as Yao was fuming, other people, among them 25-year-old Shan Fang, were lining up at a counter to sign up for new stock accounts.

“I don’t know anything about stocks,” admitted Shan, an employee at a local machinery company. “But many of my friends are investing in stocks right now.

“Today’s drop doesn’t matter to me,” she added. “I haven’t bought any stocks yet. Besides, I heard it is still a bull market and that before the Olympics, the government won’t let the stock drop much. It’ll still go up.”

China is scheduled to host the summer Olympics in 2008.

Many investors continue to believe that the central government will hold up the stock market, even if it means funneling money into publicly traded companies. But the Shanghai stock market’s capitalization has grown to nearly $1.8 trillion. That could make it more difficult for the government to bolster share prices if they began to collapse.

Chinese officials had previously taken some steps to quell speculation by tightening restrictions on banks lending money to customers for stock purchases. Nonetheless, there is ample cash available for stock investments, as the economy has boomed and average Chinese have accumulated large sums of savings at banks that pay paltry interest rates. Rules that restrict Chinese from making overseas investments also have been a boon for local stocks.

“The final solution for the government is a capital gains tax,” said Andy Xie, an independent economist based in Shanghai. But he added that such a move carried a huge risk for Communist Party leaders because it could lead to a steep fall in the market.

“The issue is all these retirees if they lose everything,” Xie said. “They may wake up and feel they were cheated. Then you have a social problem.”

Said Mei Xinyu, an analyst with the Ministry of Commerce: “The government doesn’t want the bubble to grow, but neither does it want it to collapse.”

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Times staff writer Tom Petruno in Los Angeles and Times researcher Cao Jun in Shanghai contributed to this report.