Unfazed, small investors stay in China's market

Standing before a bank of computer terminals as the Chinese stock markets opened for business on Thursday morning, the trader was blasé about the slump in stock prices on local exchanges that had triggered a worldwide sell-off two days earlier.

"Stock markets go up and down. I've seen falls before," she says. "Yesterday, I was buying again; I like steel stocks, and iron-ore mining shares."

But Mrs. Wang (she declined to give her first name) is not the power-suited securities analyst she sounds like. She is a kindly looking old lady in brown woolen slacks, sensible shoes, and a warm-green sweater who says that she trades because "it kills time. I've got lots of friends here, and we can chat."

There are tens of millions of small investors like Wang in China, and not many of them understand very much about investing. That is perhaps why none of the amateur punters hunched over their screens at the Yin Tai Securities share-trading house Thursday wanted to take responsibility for the alarm that spread from Shanghai across the world's stock markets earlier this week.

"I don't think I myself have much impact on global stock markets," Wang says modestly. "I only trade about 10,000 to 20,000 RMB a day ($1,300 to $2,600). "Even as a group, I can't believe we had that much influence."

After a five-year slump, Chinese stocks took off like a rocket in 2006. The composite index of China's two exchanges, in Shanghai and Shenzhen, gained 130 percent.

The prospect of that sort of profit sent millions of Chinese into a share-buying frenzy, as they opened accounts in the expectation of getting rich more quickly than had ever seemed possible before.

"It sounds as if investing in stocks is as easy as picking up cash from the ground," says Wang Hong, fund manager for Hengtian Investment Management, a small Shanghai firm that helps individual investors place their funds.

"These days I get a lot of queries from small investors," he adds. "But only 20 percent of individual investors know what they are doing. The rest are naive."

Naive or not, individual investors hold 99.8 percent of Chinese share trading accounts, do 92 percent of trading business, and own 63.6 percent of Chinese shares by value, according to researchers at the Shanghai stock exchange.

And they flock to places like Yin Tai Securities, which occupies the ninth floor of an office block in downtown Beijing. In a low-ceilinged, smoky room full of computer screens set into stand-up cubicles, crowds of citizens, mostly middle-aged or older, spend their days poring over charts and graphs tracking share prices, or simply exchanging gossip and tips.

Those tips do not always work out.

Mrs. Zhou, a retired administrator at a research institute, has been driven to distraction by this week's exceptional market volatility.

"If the markets keep falling the way they did on Tuesday, people like me will not be able to stand it," she complains, fingering a copy of "China Securities Journal," a widely followed tip sheet.

"I lost 10,000 RMB ($1,300). One year of my pension, gone in a single day. I am frightened," she says. "All I have is my pension, and I've put all my savings into stocks."

She earned little sympathy from Wang, who scoffed that it "would be ridiculous to put all my money into the stock market." And most of her neighbors at the trading screens betrayed little emotion about the losses they had suffered earlier in the week.

"People were definitely nervous" on the trading floor last Tuesday, says Buan Zhihuan, a retired marketing executive, but the 8.8 percent one-day price drop caused "no panic. People were ready for a general readjustment after the increases we saw last year."

"If you have gone up nearly 150 percent in little over a year, losing 9 percent of the frosting does not really spoil the cake," says William Overholt, director of the RAND Corp.'s Center for Asia-Pacific Policy, and a former investment banker in Hong Kong.

Analysts are still scratching their heads over exactly why Chinese share prices dropped so precipitously; it appears that private funds investing for groups of individuals decided to take profits when the market closed Monday night at a record 3,000 points – a psychological barrier – and hordes of retail investors followed suit.

The drop does not appear to have dented local confidence. Even as prices were experiencing their greatest one day drop in a decade Tuesday, 188,876 trading accounts were opened – two and a half times the daily average in February.

On the Yin Tai floor, former fighter pilot Chen Xitai is not fazed. "We are in a boom market, and the characteristics of such a market are gradual increases and sudden drops," he says firmly. "I have confidence in the Chinese markets."

Mr. Chen's wife, Wan Hui, seemed a bit proud that for a day at least, Shanghai's bourse had behaved like a global price-setter. "Outside China, people pay attention to us now," she says. "I hope China gets stronger and stronger in the future so foreign countries will not look down on us."

That foreign stock exchanges should have followed Shanghai's lead, however, in tumbling one after the other, was "absurd," says Mr. Overholt.

If batty grannies acting on wild rumors led Wall Street's highest-paid analysts by the nose, says Tang Xiaosheng, strategic analyst with Guoxin Securities, a Chinese brokerage, it was because "foreign investors do not understand the Chinese market and economy the way the Chinese do."

The stock market bears little relationship to the real economy, Mr. Tang points out. From 2001 to 2005, the economy grew by nearly 9 percent a year; stock prices fell 50 percent over the same period.

Prices are high now, says Overholt, largely because Chinese investors have nowhere to put the $4 trillion in savings they have accumulated except in bank accounts yielding 1.6 percent interest after tax or the stock market.

Faced with that choice, "a lot of money goes into speculation that drives [share] prices to completely unreasonable values, so the market is vulnerable to periods of sudden deflation," he says.

It is also subject to manipulation, says Mr. Buang, who noted that shares in state-owned banks led the price rally on Wednesday, suggesting that the government had stepped in.

"Here it's not like America or Europe where there are rules and markets follow them," Buang says. "Here it is all rumors spread on purpose."

The Shanghai exchange's loss of 3 percent Thursday did not seem to bother many of the investors at Yin Tai. Even Mrs. Zhou was smiling, in a dazed sort of way. "What else can I do?" she wondered.