Chinese stock market boom times

The AP today carried an interesting story about the stock market boom in China. The Shanghai Composite Index has gone past the 4000 mark. And it could go past 5000 in a month. This, on top of a 130% increase last year.

One broker was quoted as saying that 6 months ago they opened 4-5 new accounts a day - now it's 40-50 a day.

This trading is called, "chao gu" -- stir-frying stocks.

And people are mortgaging their homes and dipping into retirement funds to buy their shares of stock. Trading volume in Shanghai and a smaller exchange in Shenzhen recently exceeded all other stock markets in Asia -- including Tokyo.

A 60-year old cleaning lady doubles her initial investment of 20,000 yuan in two months -- and is celebrated in the media.

P/E ratios are around 30 to 40 -- still well below 1999 Internet and high tech stock pinnacles in the US.

Yet the article concludes with the observation by a Chinese woman that, "We hear that before 2008, the government won't let the prices fall. We're not afraid."

Personally, I think somebody ought to be afraid. True, China's economy is growing at about 10%, an incredible rate. But so much of what the article describes sounds like 1999 all over again.

Apparently bank accounts pay just 3% dividends. I don't know if there's anything equivalent to American certificates of deposit or CDs, but the Chinese want higher growth.

I'd think the Chinese government would also be frightened of this boom. If everybody panics and wants to sell, how are they going to keep prices up, whether the 2008 Olympics have taken place or not?

China's huge push for growth comes out of a need to employ millions more people every year. Plus, there is a lot of unreported unrest in the countryside. If millions of Chinese people see their retirement savings vanish or lose their homes due to a stock market crash, that could cause a lot of damage to the economy, and pose a threat to the authority of the government.

It could soon be interesting times, investing in China.


Chinese stock market boom
Chinese stock market boom