The Last Time This Many 'Investors' Chased Chinese Stocks, They Crashed

The speculative fever in Chinese stocks has reached 11 on the Spinal Tap amplifier of euphoria. Last week saw a stunning 900,000 new stock trading accounts opened - the most since October 2007 (right before the Shanghai Composite collapsed 70% in the following 9 months). With real estate prices floundering, everyone and their pet rabbit is piling into Chinese stocks, as one 'investor' explained to The NY Times, "almost everyone I know is investing, so I think I should be investing, too."

Nope, no speculative frenzy here!!!


As The NY Times reports, despite the reputation for widespread insider trading and other manipulative practices...

On Dec. 19, the China Securities Regulatory Commission said in a news release that it had started market-manipulation investigations involving the shares of 18 companies with small market values. The regulator has been seeing new types of short-term manipulation, including “pump and dump” schemes in which investors talk up certain stocks to lift their prices, then quickly sell them at a profit, according to the statement, which was published on its website.

China’s stock markets still attract investors in droves at the earliest signs of a rally...

“Everyone just wants to make some money, so it becomes like gambling,” said a 65-year-old retiree, Mr. Yang, who declined to provide his full name while discussing his investment behavior.


“Why do gamblers continue betting even when they are losing money?” he asked while flicking through screens of stock prices and charts on a trading terminal at a Beijing brokerage firm this month. “It’s the same investing in stocks. If you lose money, you want to make up the losses. If you earn money, you want to earn more.”

And gamble they are...

Ordinary Chinese have been piling into the market at a pace not seen since 2007, before the financial crisis, in some cases pulling money from savings deposits or cashing out of property investments as they try to win big. Investors in Shanghai and Shenzhen opened nearly 900,000 new stock trading accounts in the week that ended Dec. 12 alone-, the most in seven years.

Although the Chinese leadership has long hoped to see a rebound in the country’s stock markets, the current frenzy carries risks that could stick investors with heavy losses. Much of the trading is also being done on margin, or by using borrowed funds to buy shares. So the boom could unwind even faster if sentiment sours. Authorities are trying to curb the worst excesses of the boom...

“There’s so much leverage in the market now that it’s really easy for it to become very volatile,” said Anne Stevenson-Yang, a co-founder of J Capital Research in Beijing.


China’s market regulators “are not going to tamp down expectations, but they are going to try to control the leverage, in order to make it a little bit less of a casino,” she added.

Ordinary Chinese investors are willing to tolerate the risks partly because they have relatively few options for how to manage their savings... as real estate prices slide and wealth management products face real default risks...

But as Mr. Chen and others are discovering, China’s stock markets can be much more volatile than money market funds.


“This is the first time I invested in stocks,” Mr. Chen said, adding that he uses social media to track analysis of the markets and for stock recommendations.


“I sold some stocks before and made some money, but now, over all, I am losing money,” he said. “I am still learning.”

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