WSJ -- Stock Frenzy In China Stokes Official Concern ...........................
January 30, 2007
Stock Frenzy In China Stokes Official Concern
Investors Pile In, Using Homes as Collateral, Tapping Credit Cards
By JAMES T. AREDDY
As China's stock market continues its record-breaking rally, regulators are increasingly expressing concern that the country's growing ranks of investors are doing everything from mortgaging their homes to borrowing against their credit cards to get in on the action.
China's stock-market benchmark, the Shanghai Composite Index, rose 130% in 2006 and has continued its climb this year, keeping Chinese stocks among the world's top performers. Monday, the index rose 2.2% to 2945.26.
Foreigners have direct exposure to Chinese companies through Class B shares, which trade in foreign currency and have been surging as well. But Class B shares remain a small slice of China's markets. Class A shares -- which are denominated in Chinese yuan -- represent the vast majority of capital.
In a frenzy that recalls the late-1990s dot-com boom in the U.S., the rally has drawn in a new generation of investors. Online trading is spreading rapidly, and in recent weeks individuals have been opening stock-trading accounts at the rate of about 90,000 per day, 35 times the pace of a year earlier.
At an outlet of Tian Tong Securities in Beijing, Li Hua, a 41-year-old Beijing housewife, said she opened her first trading account Monday after watching stocks soar over the past year. "I want to try my luck," says Ms. Li. Standing nearby, a 28-year-old phone-company employee says that, while some analysts say stocks are expensive, he thinks "prices are reasonable" compared with prices seen in the 1990s, during a previous market boom.
Regulators say they are increasingly seeing signs that investors, caught up in the stock mania, are pledging their homes as collateral for personal loans, or teaming up with merchants to, in effect, borrow from their credit cards, presumably hoping that stocks will rise enough before the bill comes due to pay off the debt.
The credit-card maneuver typically works like this: Merchants, in return for a commission, agree to process a transaction that lets the cardholder obtain cash at a lower cost than a conventional cash advance. Investing borrowed money is risky, however, because if the market reverses course, investors not only lose on their stocks, they are also on the hook to repay their borrowings.
Data on practices like these are scarce. But they are becoming common enough that the government is starting to take notice. In a recent directive to credit-card issuers, the China Banking Regulatory Commission warned banks to be on the lookout for suspicious credit-card transactions. The four-page statement, which was reviewed by The Wall Street Journal, also warned that such transactions are being advertised online.
The regulatory warning doesn't specifically mention stocks. But according to an official at one of China's biggest banks, China Construction Bank Corp., it is being interpreted as a clear reference to stock-investment strategies. The directive is dated Dec. 15, but only began filtering down to rank-and-file bank employees in the past week.
The warning is just one of the steps regulators have taken in their efforts to damp the market's feverish 20-month rally without denting investors' enthusiasm. The China Securities Regulatory Commission, for example, hasn't permitted the sale of any new mutual funds this year, following the launch of 92 new funds in 2006, according to research firm Lipper Inc. As a result, investors have piled into existing funds, opening 300,000 new accounts on a single day in January, says Zhou Liang, a Lipper analyst in Shanghai.
Monday, in another indication of rising government concern, state-run China Central Television broadcast a midday program citing the risks of stock-market investing, in particular the "taboo" practice of funding stock purchases using homes as collateral. "Even in a bull market, 30% to 40% of people would suffer losses," the program's anchor said.
The broadcast "was arranged according to a requirement of the Central Propaganda Department," says a person with knowledge of the situation.
China's leadership is keenly sensitive to the political risk of a slumping market. In the previous bull-bear cycle, stocks fell for almost four years straight after the Shanghai Composite peaked in 2001, then tumbled sharply. At the start of that slump, some investors blamed the Communist Party for their losses, because the party's mouthpiece People's Daily had essentially endorsed stock investment just weeks before.
Reforms in recent years have made the market more stable than it once was. In the first three years after stock trading began in China in 1990, the Shanghai index jumped by a factor of six, a rally so intense that riots broke out among people hoping to get in on initial public offerings. Throughout the 1990s, stock manipulation and other scandals became commonplace, exacerbating huge swings in stock prices. Then, in 2001, investors grew unnerved by the high price of stocks, as well as the government's high levels of corporate ownership, and the market's foundations crumbled.
In 2004, amid the extended slump, a contrite Premier Wen Jiabao took the unusual step of acknowledging in a nationally televised conference a poll showing that weak stocks were the public's top concern. Within a few months, Beijing initiated an array of market reforms. (China still doesn't permit brokers to offer margin trading, or investing with borrowed funds, to individuals.) The reforms started paying off around mid-2005, when stocks began climbing from an eight-year low.
Since then, investors have embraced the market. As of earlier this month, there were about 80.5 million individual investment accounts in China. Overall, stock-market capitalization in Shanghai and the southern financial hub of Shenzhen has ballooned to just over $1 trillion. While that doesn't make it a big market globally -- the New York Stock Exchange had a total capitalization of $26.5 trillion as of Dec. 31 -- it places China as third in Asia, behind Japan and Hong Kong.
This month has featured some of China's most active trading sessions ever. The benchmark Shanghai index has added a whopping 31% in the weeks since it surpassed its previous record close in mid-December. That represents a gain of 191% since the eight-year low touched in mid-2005.
The valuations of some Chinese stocks are "approaching bubblelike levels," said Michael Hartnett, global emerging-markets strategist at Merrill Lynch. In particular, the shares of some Chinese financial institutions are now trading at between four and five times their book value, which is roughly double the equivalent figure for their counterparts in the U.S.
According to investment bank UBS, Chinese stocks now trade at a price/earnings ratio of about 33 times, while Hong Kong stocks are closer to 18 times.
If the current trading frenzy continues, there are further steps the government could take to calm things down. UBS economist Jonathan Anderson says authorities could soon enact taxes on short-term capital gains or otherwise act pre-emptively to slow stock gains.
Meantime, officials are treading a careful line with their comments. During a government strategy session this month, China Securities Regulatory Commission Chairman Shang Fulin credited structural changes for reviving investor confidence, but reminded delegates that arduous work is needed to sustain gains for the long term.
The closest Mr. Shang came to a warning: "We should keep a clear head in judging the current market."
--Joanna Slater contributed to this article.
Write to James T. Areddy at james.areddy@wsj.com
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