China's volatility rattles markets around the world

February 28, 2007|By New York Times News Service

SHANGHAI, China -- In China's wild, cowboy stock market, record-breaking run-ups have been followed by market mini-crashes that have been largely confined within this country's borders.

But yesterday, China's worst one-day tumble in a decade set off a tumult that rolled through markets from Tokyo to Frankfurt to Brazil to Wall Street.

The stock wreck shattered all sorts of records, and analysts say there was no clear reason for the plunge in Shanghai, equivalent to a 1,100-point drop in the Dow Jones industrial average. But the Chinese stock market was rife with rumors that the government was considering new measures to tame the world's hottest stock market before a bubble developed.

To many investors and analysts here, the huge sell-off was just the latest indication that share prices in China have been defying reality. Millions of everyday investors are rushing blindly into stocks, emptying out their savings account to "play the market," as many of them here say. The Chinese government is worried about a bubble and crash that could send bankrupt individual investors into the streets in protest.

People in China refer to the stock market as dubo ji, or the slot machine. The gyrations have become almost commonplace for a stock market that suffered through a five-year depression until 2006, when it rose more than 130 percent, the world's best performance.

Perhaps the most remarkable sign of the recent irrational exuberance underpinning China's stock markets is that during the past year, when a company has announced bad news, its stock price has been shooting through the roof.

Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Co. failed to report quarterly earnings in April, its stock doubled.

Analysts say that at least in some cases, the stocks of tainted companies have risen because the companies were viewed as shedding old problems and starting anew. They also argue that the market has been rising because of stronger fundamentals, rising profits, improved regulations and oversight by officials, and confidence in the market's long-term growth prospects.

Government officials began cautioning several weeks ago against "blind optimism" in the stock market. Banks were ordered to stop making loans to people who were speculating in the market. Trading volumes have been so high that the Shanghai Stock Exchange recently warned that the country's electronic trading system could be destabilized.

China's stock market system is still relatively immature, and trustworthy information about a company's performance is still hard to come by. So the average investor does little or no research.

"There's just too much liquidity out there, too much," says Chang Chun, a financial reform expert at the China Europe International Business School in Shanghai. "This is a psychological thing."

Stock prices fell sharply for four consecutive days in early February as investors seemed to contemplate the possibility of an overheated stock market.

After a brief pause, they rushed in again. Foreign money is also piling in, according to JPMorgan, and hardly an analyst is willing to bet against the stock market.

"You can't be a fundamental investor in China," said Michael Pettis, a professor of finance at Peking University. "You can only speculate."

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