Han Qianqian blames peer pressure for getting her into the stock market. Her friends and neighbours had started trading and they were making money. “That convinced me to try it, too, especially since the market is good right now,” said the 28-year-old Beijing doctor.
And so, at the end of February, she opened her first account. She bought three stocks, investing the equivalent of roughly $700. Twenty days later, they were up 10 per cent.
“It was easy money,” she says. She sold, and thought about taking a break. But her friends pushed her back in, saying there’s more to be made. So now she is back buying again, trading on her mobile phone. She doesn’t know much about companies or public markets, so “I follow my friends’ advice on what stocks to buy – medical, science and technology companies,” she said.
But ignorance hasn’t kept anyone from making money in China’s stock markets of late, which are roaring through one of the greatest rallies of recent times – one driven largely by young, small-time investors such as Ms. Han, sucked in by the lure of what has been practically risk-free profit. The Shanghai composite index is up 111 per cent in the past year; Shenzhen is up 115 per cent. Even the Nasdaq, in frenzied 1999, only managed to increase 86 per cent in 12 months.
The otherworldly performance has prompted warnings that a crash is inevitable. On Tuesday, Shanghai stocks fell 4.1 per cent, and both Chinese bourses marked their biggest drop since January amid new tightening on margin financing for Chinese investors.
The Shenzhen composite index remains valued at a stratospheric 50 times earnings, and Mark Mobius, the executive chairman of Templeton Emerging Markets Group, on Tuesday predicted a 20-per-cent correction.
It’s happened before: A crash in 2007 erased 72 per cent of the Shanghai market’s value – today, it remains one-third below the precrash high – and wiped out $3.5-trillion in wealth.
Even those who believe China’s stock markets are far from fizzling can’t quite get their heads around what has happened in recent months, particularly in Shenzhen.
But there’s good reason to believe “the massive stampede of retail money,” as David Welch calls it, still has a good ways to run.
“It’s been a massive awakening of animal spirits,” said Mr. Welch, head of Asian equity distribution for Reorient Group, a Hong Kong-based brokerage. In Shanghai, for example, many of the “bigger-cap stocks are trading at either low to mid-teens kind of ratios,” he said. They are “still fairly cheap.”
The central government has ample incentive to keep things going.
For years, an effervescent property market has made many Chinese wealthy. Now that real estate prices have stalled out, stock markets have provided an alternative for attaining wealth – and, with it, good feelings toward the country’s authoritarian government. “The top leaders would like to see good growth in capital markets to keep Chinese people happy – and to divert their attention from the fact that the real economy is in a bad situation,” said Shen Meng, executive director of Chanson Capital, a boutique investment bank in Beijing.
China’s industrial performance has plunged, with the latest HSBC Purchasing Managers’ Index firmly in contraction territory. Central planners are struggling to meet their 7-per-cent growth goal for 2015, and reform efforts have been slow to provide meaningful change.
But embedded in the reform is further reason to keep the stock market healthy, as mainland authorities ramp up the pace of initial public offerings and debt-to-equity swaps. The tools China is using to perk up the economy – loosening reserve ratio requirements and lowering lending rates, with more expected to come – also juice markets with new capital.
As important, there is little evidence of a letup in interest among the new crowd of Chinese investors. In March alone, 4.8 million new trading accounts were opened in China.
One of them belongs to Su Wenting, 28, a web page designer in Beijing. She has been studying money management for years, enrolling in an online course on deciphering listed companies and reading Rich Dad Poor Dad by Robert T. Kiyosaki. For now, she hasn’t bought any stocks because her spare money is going into an apartment in her hometown. But once that’s paid off later this year, “I plan to invest 60 per cent of my spare money,” she said, and expects her investment to quickly rise to tens of thousands of dollars.
She’s not particularly risk-averse, saying she will sell if a stock loses 50 per cent, particularly in early days as she learns. “Investing is a lifelong pursuit,” she said.
Part of Ms. Su’s education has come from an investing group on WeChat, one of China’s biggest social media forums, run by Rocky, 30, a stockbroker who declined to give his surname. Most of the members are 20 to 40 years old, a young and educated cohort determined to manage their own finances. “Chinese don’t really trust putting their money in other people’s hands,” Rocky said.
He shrugged off the froth in current markets.
“Bubbles represent investors’ hopes and expectations. It means they have confidence,” he said. “Some customers have asked me recently if they should sell their houses and buy stocks.”
Still, some have found the good times as frustrating as they are lucrative, as market valuations surge with little relation to logic or corporate performance.
“I used to really admire Buffett’s value investment theory,” said Li Xinbao, 27, an engineer in China’s coastal Jiangsu province. “But I found it doesn’t work in China. The Chinese market is still too based on speculation.”
With reporting by Yu Mei