World-wide Bubble -- Eager Chinese grab bull market by the horns
As the Shanghai index soars, exuberant small investors are buying in, often on credit
Los Angeles Times -- By Don Lee, Times Staff Writer -- February 16, 2007
latimes.com
SHANGHAI — After emptying his savings account, Lu Gang borrowed funds from his mother, relatives and friends. Now he's planning to mortgage his home.
Where's all the money going? Into China's booming stock market.
"Both of my parents think it's crazy, but I think it is OK," said the 26-year-old investment company manager, who's already sunk about $15,000 into stocks since getting in on the action last summer. "If there is opportunity, you have to grasp it."
Millions of Chinese have entered the trading frenzy in the last year amid the strongest bull market in the nation's young capitalist history. The Shanghai composite stock index has doubled since August after four years of dismal performance. On Thursday, the Shanghai index set a fresh record, gaining 3% to finish at a whisker below 3,000.
Many individual investors have reaped handsome profits, but a growing number of them are tapping their credit cards and using their homes as collateral for cash to buy more stock, say bankers and analysts. That has stoked government concerns about excessive speculation.
China prohibits banks from giving consumers home-equity loans to play the stock market. So many people are hocking their homes with pawn shop dealers, who typically front borrowers as much as 60% of the value of their homes — but charge an annual interest rate of 36%.
China's Pawn Assn. recently warned its members about the risks of making such loans, saying that although it is quick and easy to advance cash to clients, collecting on loans in default is another matter. "It's quite complicated and troublesome to transfer ownership," said Wu Xianda, director of the association, which has about 100 members.
At Jinbao Pawn Shop in Beijing, manager Hu Bo usually sees a surge in business this time of year. Before the lunar New Year, which falls on Sunday, bosses seek extra cash to settle debts and pay bonuses to employees. But Hu estimates that the stock mania has helped push up Jinbao's mortgage loans by at least 30% this year.
"We do not encourage people to do this," he said.
He recalled one client in particular, a man in his 40s who mortgaged his 800-square-foot apartment in Beijing for $40,000. "I told him that he might suffer losses, but he insisted anyway. He was very confident. He said, 'I have targeted one good stock and I just need the money for one month.' "
Such optimism may seem misplaced. Since China's stock markets opened 16 years ago, they have been plagued by scandals, the government's high ownership of shares and weak regulation. Investors have seen wild price swings and sudden collapses of fortunes. Just two years ago, the Shanghai index was languishing at 900.
But these days the mood is jovial.
"Look, look … how could this rise so high," shouted one elderly man, peering at a big electronic board at Wanguo Securities' trading hall in central Shanghai one morning this week.
By the opening of markets at 9:30 a.m., all 30 computer stations at the hall were occupied. Many people were standing in the lobby, laughing and telling jokes. One man slapped his thigh after watching a stock move up.
"I want to purchase more bank stocks and maybe tourism ones. People travel a lot during the holidays…. Maybe wine stocks too," said a man in his 60s who gave only his last name, Song.
Technically, day trading isn't allowed in China; investors can't buy and sell the same shares within 24 hours. But there are ways to get around that, and many investors are clearly in it for the short term.
Most analysts agree that the fundamentals are better than in the past. By one common valuation, the average share price is running about 30 times earnings; it was twice that during the last big boom in the '90s. Although transparency remains a problem, Beijing has helped shore up investor confidence by reforming state-owned shares and relaxing controls on foreign stock ownership, allowing investors to gain from China's surging economy. The markets also got a lift from hot new issues in banking and real estate stock.
"A new generation of investors is appearing in China," said Zhang Qi, an analyst with Haitong Securities in Shanghai. "They are young people with better knowledge and understanding of the market. They use the Internet to research companies … and they are more confident."
Still, Zhang said, many of them haven't experienced losses and may be holding unrealistic expectations. "Everyone wants to make money from the stock market, and they all feel it should be easy this time," he said.
Beijing doesn't want the market to get overheated. A collapse in share prices could stir social unrest. Officials want to grow the nation's capital markets and give citizens, insurance firms and pension funds a place to invest for the long term.
But regulators also want to head off a stock bubble by reducing speculative behavior — something easier said than done.
In cities such as Shanghai, big banks have been making fewer new-home mortgages because of a softer real estate market. These banks have been pushing other kinds of consumer loans, including those secured by borrowers' homes. Yet no one knows how much of those funds are being diverted to the stock market.
"When the loan is approved, we cannot control its usage," said Zhang Yinjun, a manager in the personal banking department at China Merchant Bank in Shanghai.
China's pawn shop owners say the same thing, even as their business is booming.
Pawn traders in Beijing, for example, released a total of about $330 million in funds last year, a 45% jump from 2005. Most of these loans were secured by homes. The loan process is simple: a few documents and a day or two later usually, the deal is done.
Su Cheng, a 26-year-old native of Anhui province, jumped into the market last year. He plowed his entire savings into shares and then turned to his former classmates for more funds.
So far, Su has seen his investments soar 80% and now has about $13,000 in his stock account.
"My gain is not too bad until now, but my capital is still not enough," said Su, who works for a Shanghai investment and acquisitions firm. "If I had 1 million instead of $6,500, then I would have 2 million in my account now."
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