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Investors monitor the movement of stock
prices at a brokerage firm in Guangzhou, South China's Guangdong
Province May 9, 2007. [newsphoto]
Xiao Feng, a former investment consultant at a futures company
in Nanjing, put his three apartments and two vehicles - worth 5
million yuan - up as collateral days ago to get a 10 million yuan
loan to invest in the stock market.
But the cost of borrowing is high - with an annual interest rate
of 25 percent, he'll have to pay the lender 2.5 million yuan in
interest at the end of the year, reported the Nanjing Morning
Post on Wednesday.
In addition, the lender will monitor his stock trading account.
If the value of Xiao's portfolio drops below 8 million yuan, the
lender will liquidate his stock holdings to prevent a further
decrease in the principal, spelling a loss of two million for
Xiao.
When the 2.5-million interest payment is also taken into
account, Xiao Feng will lose what he has worked for in the past 10
years - all his collateral.
Then why take such a risk? "Maybe it is the lure of the stock
market. If an investment in a stock triples, or quadruples in a
short period, then why not try?" he replied.
What Xiao is doing mirrors an investment mania that is sweeping
across China. The stock market has soared more than 50 percent so
far this year on top of a 130 percent gain in 2006, drawing tens of
thousands of investors in each day.
Record number of investors flood in
A total of 4.79 million new A-share trading accounts were opened
in April, 853,500 more than the combined total for the previous two
years, according to statistics from the China Securities Depository
and Clearing Corporation.
On Tuesday, the first trading session after the week-long May
Day holiday, nearly 370,000 A-share accounts were added, almost
half of the number for the whole year of 2005.
Figures for the new accounts are considered a rough indicator
for the number of new individual investors entering the market
although there have been cases in the past where individual traders
have opened thousands of accounts using fake identification.
There is also the issue of double counting as most investors
open accounts in both the Shanghai and Shenzhen stock exchanges so
they can buy stocks in companies listed in either cities, so in
fact the actual number of investors will be less than the number of
accounts.
By Wednesday, the number of accounts at the Shanghai and
Shenzhen bourses is almost 95 million, official statistics
showed.
Experts estimate there are at least 30 million individual
investors in the country. Suppose each investor is in a family of
three, then that means at least 90 million Chinese are directly or
indirectly involved in the stock market.
Given the fact that nearly 800 million of China's 1.3 billion
people live in the rural areas and do not have easy access to stock
investment, the percentage of people investing in stocks is
high.
Worries about bubbles
The wave of new money has consistently pushed the Shanghai and
Shenzhen markets to new highs.
The benchmark Shanghai Composite Index broke the psychologically
important barrier of 4,000 points on Wednesday, less than two
months after surpassing the 3000-point mark.
The sharp gains are once again raising worries about stock
overvaluations. The stocks in the Shanghai and Shenzhen markets are
trading at more than 40 times of listed companies' earnings per
share on average, much higher than developed markets overseas.
The growing bubble in the country's stock market is a concern,
said central bank governor Zhou Xiaochuan last week, adding he
would closely monitor asset prices, the consumer price index and
producer price index.
Zhou's remarks added to speculation there could be an interest
rate hike as early as next month.
Xie Guozhong, former chief China economist for Morgan Stanley,
suggested regulators should come up with certain policies to put
the brakes on the surging stock market for the good of long-term
economic development and social stability.
"China's equity market is starting to show signs of getting out
of control," said Zuo Xiaolei, chief economist of China Galaxy
Securities in China Securities Journal on Wednesday
The market rose even after the interest rate rose in March, and
the bank reserve ratio increased in April, said Zuo.
"The neglect of government policy and blindly pushing up the
equity market fosters a big market risk," he claimed.
Much pain if bubble bursts
When the bubble bursts, the pain will be much more painful as
the losers are those that can least afford to lose their money,
analysts said.
Unlike developed markets overseas, individual investors make up
a majority of China's stock market, including a lot of retirees who
risk losing their hard-earned savings.
Last week, a senior surnamed Zhang, 61, in Nanjing asked his
daughter to invest his savings of 60,000 yuan into the equity
market in hope of making a quick profit, reported the Nanjing
Morning Post.
He did this despite being a victim of the bear market two years
ago when he lost 75 percent of his 20,000 yuan investment,
prompting him to pledge to stay out of the equity market
forever.
But because of the booming stock market, he says, "it seems that
I am losing out if I don't get involved."
Besides retirees, university students are also joining the bull
run. Xiao Li, a student of Nanjing University, opened an account at
a local brokerage firm in March. Part of his 10,000 yuan investment
came from his parents for his daily expenses and the rest was
borrowed from his girl friend.
He hopes to double his investment, at the expense of his
nutrition. "To save money, I often just eat porridge and steamed
bread for meals," said Li.
(China Daily May 12, 2007)
