28 February, 2007

From Shanghai, Tremors Heard Around the World

In China’s wild cowboy stock market, record-breaking run-ups have been followed by mini-crashes that have been largely confined within this country’s borders.

But on Tuesday, China’s worst one-day tumble in a decade set off a tumult that rolled through markets around the globe, from Tokyo to Frankfurt to Brazil to Wall Street.

Speculative frenzy had lifted the Shanghai composite index above the 3,000-point milestone on Monday and then gave way to a tumultuous sell-off on Tuesday that sent shares plummeting nearly 9 percent.

The downturn shattered all sorts of records, and analysts said there was no clear reason for Tuesday’s severe drop in Shanghai, equivalent to a 1,100-point drop in the Dow Jones industrial average. But the Chinese stock market was rife with rumors that the government was considering new measures to tame the world’s hottest stock market before a bubble developed.

To many investors and analysts here, however, the extensive sell-off was just the latest indication that share prices in China had often become unhinged from the broader economy. Millions of everyday investors rushed blindly into stocks, emptying out their savings account to “play the market,” as many of them say.

Perhaps the most remarkable sign of the recent irrational exuberance underpinning China’s stock markets was that during the last year, when a company announced bad news, its stock price shot through the roof.

Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Company failed to report quarterly earnings last April, its stock doubled.

Tuesday was different, though. With shares in Shanghai tumbling, stocks listed in Shenzhen also collapsed, falling 9.3 percent. In Hong Kong, the benchmark Hang Seng index fell 1.76 percent, and in Japan, the Nikkei dropped about half a point, to 18,119.92.

The volatility of Shanghai sometimes produced unusual results. Shares of the Industrial and Commercial Bank of China, which went public simultaneously on the Shanghai and Hong Kong stock markets last October, performed very differently on the two markets, for example. I.C.B.C. shares dropped 8 percent on Tuesday in Shanghai but just 1.8 percent in Hong Kong.

But with stocks in Hong Kong reacting on Wednesday morning to the global sell-off, I.C.B.C. shares dropped 3.7 percent on Wednesday morning in Hong Kong but rose two-tenths of a percent in Shanghai.

None of the world’s major stock markets have been as volatile as that of China, where people refer to the stock market as “dubo ji,” or the slot machine. The gyrations have become almost commonplace for a stock market that suffered through a five-year depression until 2006, when it rose more than 130 percent, the world’s best performance.

The Chinese government, however, is worried about an over-reaction that could produce a bubble and then a crash that could send bankrupt investors into the streets in protest.

Analysts say that at least in some cases, the stocks of tainted companies have risen because the companies were viewed as shedding old problems and starting anew. Still, some of those problems reflect deep cultural attitudes and are unlikely to be fixed overnight.

Analysts also argue that the market has been running up because of stronger fundamentals, rising profits, improved regulation and oversight by officials, and confidence in the market’s long-term prospects.

But in this current run of market mania, even corruption appears to be a buy signal. That was the case for the Shanghai Bailian Group, which reported on Dec. 29 that its chairman was under investigation for fraud. The company’s shares have climbed 45 percent since then.

Two weeks ago, after the chairman of the Shanghai Hai Niao Enterprise Development Company was detained, his company’s shares rose 15 percent.

“There’s just too much liquidity out there, too much,” says Chang Chun, a financial reform expert at the China Europe International Business School in Shanghai. “This is a psychological thing.”

China’s stock market system is still relatively immature, and trustworthy information about a company’s performance is still hard to come by. So the average investor does little or no research.

Just to find names of stocks to buy is a task for new investors. So if they see even a mention in the press, positive or negative, they start buying. If alert investors are lucky, they might get a tip. If state television mentions a company, it must be worth something, and if they don’t catch the full story, they at least have a name.

“If I hear a stock mentioned on the TV news I will pay attention to it,” says Xu Xiaochen, a 55-year-old retiree.

In any case, many investors here seem to believe that the secret to picking stocks is luck and confidence in the government, not the fundamentals of any particular company.

“I don’t know how to choose a stock,” says a 61-year-old retiree who gave her name as Miss Hou at a local brokerage house a few weeks ago. “But I trust those technology companies. Maybe the names of some companies sound lucky to me, so I choose to buy these stocks.”

Government officials began cautioning several weeks ago against “blind optimism” in the stock market. Banks were ordered to stop making loans to people who were speculating in the market. Trading volumes have been so high that the Shanghai Stock Exchange recently warned that the country’s electronic trading system could be destabilized.

Stock prices fell sharply for four straight days in early February as investors seemed to contemplate the possibility of an overheated market.

After a brief pause, they rushed in again. Foreign money is also piling in, according to JPMorgan, and hardly an analyst is willing to bet against the stock market.

“You can’t be a fundamental investor in China,” said Michael Pettis, a professor of finance at Peking University. “You can only speculate.”

Mr. Pettis, who has long been a market skeptic here, is now raising a fund to invest in Chinese stocks, based on his projections of the inflow that will push up prices.

“There’s a huge amount of money in the banking system with nowhere to go,” he said. “I think you’re going to see that money getting out of the banking system.”

Mutual funds are also helping some individual investors, while others are scrambling into initial offerings, which over the last year have had a strong opening-day track record.

Of the 15 companies that went public on the Shanghai Stock Exchange, 12 of them experienced opening-day rises of more than 10 percent.

Now, regulators are seeing a growing number of stock frauds directed at small investors. And Chinese officials worry that investors are still relying on a welfare state — which is increasingly disappearing — to take care of them.

As for the companies that are seeing their stock prices climb despite their troubles, they may be hard pressed for explanations, but nonetheless defend the phenomenon.

“The stock is the stock, and the C.E.O. is the C.E.O.,” said a woman working in the executive office at Shanghai Haixin Group after she acknowledged that the chief executive was under investigation. “As for our C.E.O.’s bad news, yes, it happened. But it is outdated and not newsworthy at all. As for the stock price, we don’t know either.”

DAVID BARBOZA, The New York Times)

Related News

China 'correction' rattles world markets - Asia Times Online

Malaysia's Stocks Drop Most in Almost 6 Years; Ringgit Slides

Malaysia stocks fell by the most in almost six years, sending the ringgit lower and extending a global sell-off sparked by a plunge in Chinese and U.S. shares yesterday.

``There's no way that we will be decoupled from what happens to the major markets,'' said Wong Shou Ning, who helps manage $136 million at Kenanga Investment Management Sdn. in Kuala Lumpur. ``Markets are global. It's like a tidal wave, you can't run.'
Tenaga Nasional Bhd. and Malayan Banking Bhd. led the decline among the nation's biggest stocks. Proton Holdings Bhd. slumped after reporting a third straight quarterly loss while Dufu Technology Corp. Bhd. gained on its first trading day.

The Kuala Lumpur Composite Index tumbled 74.17, or 6 percent, to 1162.91 at the 12:30 p.m. local time break, set for its biggest loss since April 4, 2001. The measure plunged as much as 8.2 percent earlier. The index dropped 2.8 percent yesterday.

``The whole market is taking a hit,'' said Scott Lim, who helps manage $400 million as chief investment officer at CMS Dresdner Asset Management Sdn. in Kuala Lumpur. ``Smart investors should be looking for bargains. This panic will ease once the market in China stabilizes.''

Malaysia's currency, the ringgit, fell 0.3 percent to 3.505 against the U.S. dollar as of 12:07 p.m. local time, the most since Dec. 19, according to data compiled by Bloomberg. Among Asia's currencies, the ringgit is the second-biggest gainer against the U.S. dollar this year; it ranks fourth worldwide.

``The currency's movement is part of the panic,'' Lim said. ``There has been no change in the country's fundamentals. People are taking advantage of the situation to take profit.''

Whole Market Hit !

Today's loss pared the gains in the nation's main stock index this year to 6.1 percent. The 100-member measure closed last week at its highest since Jan. 5, 1994, boosted by a 17 percent gain from end-2006.

The smaller Second Board Index fell 6.9 percent to 93.78 today, while the FTSE Bursa Malaysia Emas Index declined 6.4 percent to 7703.91. Declining stocks beat gainers 1118 to 21.

Tenaga Nasional, Malaysia's biggest power producer, lost 70 sen, or 5.7 percent, to 11.50 ringgit, set for its biggest slide since May 31, 2002. Malayan Banking Bhd., the nation's biggest lender, declined 70 sen, or 5.4 percent, to 12.30 ringgit, the lowest since Jan. 30 and shaving this year's gain to 4.2 percent.

``Malaysia will probably be one of the hardest hit because it is also one of the best performers in the region this year'' said Wong, who also owns shares in Thailand, Indonesia and Singapore. ``I don't think this means the long-term end of the rally. Nothing has changed in Malaysia's economy today compared to yesterday.''




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