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Diving Chinese stocks may sink hopes of masses

Index loses 8% Monday in rocky fulfillment of state aims. With throngs of new accounts, slide may stir social tension.

June 05, 2007|Don Lee and Tom Petruno | Times Staff Writers

SHANGHAI — The Chinese government wants to take some of the air out of the nation's stock market bubble. With another plunge in share prices this week, investors appear to be giving Beijing what it wants.

Now the question is whether the sliding market can avoid a meltdown that could ravage millions of small investors' savings and threaten social and political upheaval.

That could unnerve markets worldwide, given China's importance to the global economy.

"The risk of a sell-off in Shanghai is not just financial," said David Kotok, head of money manager Cumberland Advisors in Vineland, N.J. "It is in the political sphere. That is why it must be taken seriously."

On Monday, however, most world markets were unfazed even as the Shanghai composite stock index slumped 8.3%, bringing its decline to 15% since it hit a record high May 29. That's the equivalent in the U.S. of the Dow Jones industrial average falling more than 2,000 points.

At midday today, the Shanghai market was down an additional 6%.

"I think this is the education of the Chinese financial investor," said Christopher Orndorff, a money manager at Payden & Rygel in Los Angeles. Average investors, he said, are learning that stocks aren't a one-way street.

The latest decline has far exceeded the pullback in late February that triggered jitters around the globe. The Shanghai index plummeted 8.8% on Feb. 27 but rebounded nearly 4% the next day and quickly went on to score new highs as investors continued to pour cash into the market.

At its record close May 29, the index was up 62% year to date after rocketing 130% last year. The composite index includes Class B shares, which are available to foreign and Chinese investors, as well as Class A shares, which are primarily traded by Chinese.

Fearful of a market bubble, China's central government tripled its tax on stock trades Wednesday in an attempt to curb rampant speculation.

Despite warnings by Chinese government leaders and outsiders, millions of ordinary citizens have raced to open brokerage accounts in recent months, hoping to cash in on the biggest bull run ever in China's 17-year-old stock market.

But analysts say it appears that many more investors now see that Beijing is serious about cooling the market and may take additional steps to do so. Some experts believe that the government could impose a tax on stock market gains to further discourage fast-paced trading.

As of last week, China had more than 100 million stock accounts, up from 77 million just six months ago.

"If the bubble pops, 100 million young and inexperienced investors may express their discontent with civil unrest," Cumberland's Kotok said. "These folks have risked their savings and have no reference point for what they are doing and have done."

A collapse of China's market could cause political upheaval, analysts say, and could spread to the broader economy. That would be difficult or impossible for other world markets to ignore, Orndorff said. "It would be pretty hard to be blase about something like that," he said.

Some foreign investors have been pulling away from Chinese stocks for the last month. Global funds that invest exclusively in Chinese stocks had an outflow of nearly $2 billion in the four weeks ended May 30, or about 10% of total assets, according to Emerging Portfolio Fund Research Inc., which tracks fund cash flows.

Even as the Chinese government attempts to deflate the market bubble, it appears to be looking for ways to provide support for share prices should the sell-off deepen.

Securities regulators have approved four new funds that plan to invest in Chinese stocks, Reuters reported Monday, citing sources close to regulators. One fund is a joint venture with French financial giant Societe Generale, Reuters said. Each fund would be allowed to raise as much as $1.3 billion to invest in Chinese shares, the news service said.

Economists generally remain upbeat about China's stock market over the long term. One reason is the country's rapid growth, with its massive trade surplus continuing to pump cash into the economy.

In addition, Chinese banks pay a relatively paltry 3% interest rate on one-year deposits. With few other options, people have been plowing money into stocks to pursue better returns.

That's what Chen Yajun of Shanghai did. In April, the 25-year-old accountant withdrew the $3,900 she had saved while working at a software firm for two years. Chen put it all in the stock market. It seemed like a smart move then. She quickly made several hundred dollars.

But Wednesday, when the Shanghai index plummeted 6.5%, she gave up all her gains. Chen lost an additional $800 on paper Monday.

"I guess I should forget about it at the moment, there's nothing I can do," she said glumly. "If only I had entered the market last year, it would be easier for me to leave," Chen added. "At least I would have made some money."

Lee reported from Shanghai and Petruno from Los Angeles.

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