Why Chinese Equities Might Scare You

By Ariana Eunjung Cha
Washington Post Foreign Service
Saturday, May 3, 2008; A01

SHANGHAI -- When emergency workers found Wang sprawled unconscious after having downed two bags of insecticide, he was still clutching the PDA he had been using to check stock prices.

Like a number of other small investors in China, Wang had bet -- and lost -- his life savings, about $15,000, on the Chinese stock market. The propaganda office and doctors at the hospital where he was treated said the 36-year-old factory worker had been preparing to get married and that he had hoped to use the money to buy an apartment for his fiancee.

Wang's attempted suicide and those of other investors are a heartbreaking consequence of China's great experiment in capitalism.

In February, Li, a 25-year-old engineer, jumped from the seventh floor of the building where he worked in the city of Chengdu. His company said he had lost a huge amount on the stock market. On March 30, a 39-year-old former ice cream shop owner, also named Li, leapt to his death from his apartment building in the inland province of Shandong after losing a third of the $4,500 he had invested.

As China's stock markets crashed over the past six months, the Communist government reacted in a way most consumer investors like Wang did not anticipate: It watched from the sidelines. It wasn't until last week, after the Shanghai benchmark index's fall to a symbolic milestone, below 50 percent of its peak in October, that Beijing finally stepped in.

Its announcements that it would slash a tax on stock transactions and control volatility by requiring some big block trades to take place off the regular stock market pushed the market up 14 percent. It has fallen again since then, however.

But given that the Chinese government has the power and money to do much more, some say the fact that its help arrived so late and is so limited means it is sending a message to shareholders that they should no longer expect a government bailout in such situations.

The former shop owner's sister, Li Chunyan, 34, said she understands that those who lost everything have only themselves to blame for risking so much. But because the stock market is "damaging common people's lives this much, there should be policies" to help them. She said even the U.S. government is doing more to help its investors: "I heard about the U.S. lowering interest rates to save the market," she said. "Well, different countries are different."

In online bulletin board postings, small-time retail investors -- who, unlike in U.S. markets, make up the vast majority of those who hold money in China's exchanges -- have vented their anger at the government. "China's stock market is piled up with investors' tears and blood," wrote one shareholder.

Institutional investors, fund managers and analysts who follow the Chinese stock markets are less sympathetic, saying that the suffering of consumers who lost money is a necessary step on the road to capitalism.

"You lose money, you jump out the window, too bad. It's your problem," said Vincent Chan, head of China research for Credit Suisse. "For any market to grow, this is something the government should realize: At the end of the day it's the investors who bear the responsibility of the investment, not other people."

The nosedive of the Shanghai stock market and its sister exchange in the southern city of Shenzhen has been humbling for Chinese investors who had once believed the only direction share prices could go was up.

Analysts say they were overdue for a correction. Despite the fact that the earnings of many companies were weak and corruption was rampant, the Shanghai composite index quadrupled in value from 2002 to 2007.

Briefly in November, PetroChina became the world's first $1 trillion company by some measures of its market value. But by the end of April, shares of PetroChina had plummeted to below its IPO price for the first time.

Andy Xie, a former chief economist for Morgan Stanley Asia Pacific and now an independent analyst, said the challenge for the Chinese public is that "generally speaking, retail investors bought stocks at a high point. They listened to their relatives, friends and heard propaganda.

"When the stocks fall, they are unwilling to sell off and they sit there waiting for the government to save the markets," he said. "This is not rational."

Psychologists across the country say that in recent months they have seen more patients seeking treatment for addiction to gambling.

Li Ning, director of the Psychological Rehabilitation Department at the No. 102 People's Liberation Army Hospital in Changzhou, said that investing in the stock market should be different from gambling but that many "speculate on stocks with a gambling mentality."

He said some patients he has treated are emotionally unstable when it comes to the stock market.

"They cannot stop thinking of recovering their losses," Li said. "They throw all their money into the stock market and stay without rest in front of the computer reading. They hope they can find some positive news or policy but in vain."

Investors like Wang who came in at or close to the market's peak in October have been hit the hardest.

Wang, who had worked in factories in the southern manufacturing city of Dongguan for more than a decade, began investing in the stock market in September. For the first few weeks, it seemed like luck was on his side, and by October the Shanghai composite index had jumped 14.5 percent. The next month, it began its descent. Whatever stock Wang bought, it seemed, began to crash until, by the end of February, his holdings were valued at almost nothing.

Li Huafu, a doctor who treated Wang at the Wujing Zongdui Hospital in Guangdong province, described him as being in shock: "He was very silent, didn't speak much to others."

Li said Wang, who could not be reached for comment, returned with his mother and brother to their hometown in Shandong province. Phone numbers for Wang that were listed in hospital records had been disconnected.

Some investors like Ma Guocheng, 26 and an officer worker, say they have learned their lessons from the recent stock market plunge. In April and May 2007, Ma invested some 270,000 yuan -- about $38,600 at today's exchange rate -- in stocks. By November, those shares were valued at 440,000. He thought about selling, but then he thought they would climb even higher. Now his holdings are worth 50,000, about $7,000.

"I was greedy," Ma admitted. As a consequence, "I lost more than 80 percent of my total investment."

Researchers Wu Meng and Crissie Ding contributed to this report