Taming the Roaring Chinese Stock Market

Lynic Wang wants to have a home of his own, but property in Shanghai, where Wang lives and works, is very expensive. The two-bedroom apartment he dreams of costs between 1 million and 1.2 million yuan (about $156,453). That's far from affordable for the average Chinese professional who takes home roughly 180,000 yuan (US$23,468) a year and that's if you work for a multinational corporation. Local firms pay less. Wang's solution – invest in the stock market.

Wang, a natural resources specialist, who is invested in companies like Shanghai Pudong Development Bank, entered the market in 2004, back when few imagined the Shanghai Composite Index could breach the 2,000 level. In early May 2007, the SCI crossed over the 4,000-mark. 

"Yes, I've earned some money," Wang says, but adds that he will be selling his holdings within the next two weeks. The Shanghai market is sizzling hot right now and Wang is afraid of all the new investors pouring into the market, speculating on shares. "I have seen the market go from 2,000 to 900 points, and from 900 to 4,000. It's going up too fast," he says. 

He's right about the numbers of new investors. Last month, according to the China Securities Depository and Clearing Corp., 4.8 million new A-share trading accounts were opened. That's 853,500 more than the combined total accounts for 2005 and 2006 and more than the entire population of Singapore. On May 8, the first trading session after the May Day holidays, almost 370,000 A-share accounts were added. As of May 14, there were 96.7 million A and B share trading accounts -- approximately a third of which are actively traded.

According to a Goldman Sachs research note, household financial assets – which are mostly cash and bank deposits – stand at $2.5 trillion or 88% of gross domestic product. But with an inflation rate of 3%, and after-tax returns on bank deposits of below 3%, Chinese are flocking in droves to put their money in the red-hot A-share market. In April alone, household yuan deposits fell by 167.4 billion yuan, or $21.8 billion.

"There’s massive liquidity in China," says Vincent Kwan, director and general manager of HSI Services Ltd. "Money supply in China is increasing at a rate of 16% – 17% per year and with the economy growing around 11% and inflation at 3%, the excess money supply is huge."

So, put together a country awash in cash, millions of residents with limited investment options and a limited supply of shares and it is easy to see how the Shanghai Composite Index -- and its 800-plus listed companies -- has soared. Year to date, the SCI is up 50%, and up 247% since 2006.

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