Although he is 63 years old, Beijing retiree Du Shuzhan is not afraid to try something new. He has just discovered the stock market. A few weeks ago, he deposited $1,500 in his first share-trading account, and on a January afternoon he visited a local broker to buy shares of seven Chinese companies. "All my friends started to invest in the stock market last year," Du says. "My wife and I decided to join the trend." He admits that when it comes to deciding which stocks to buy, he lacks expertise. "I don't know much about it. I just picked the ones with low prices." But he figures he will do fine. "With all the money in the market, I don't see how it could go down."
Neither could Dutch tulip-bulb speculators in the mid-1600s nor American day traders in the dotcom boom of the late 1990s nor even Chinese investors in the early 2000s. The history of investing demonstrates that there is no faith stronger than that of newbies plunging into a molten market. And that certainly describes China today. Emboldened by last year's 130% rise in the Shanghai Composite Index--which made Shanghai one of the best-performing exchanges in the world--first-time punters like Du have been storming into Chinese stocks, ending the market's five-year slump and in recent weeks pushing daily trading volume to new records. They are ignoring the stop signs raised by market experts and government officials, who warn that a correction might be coming.
Last year 2.4 million investors began trading stocks through the Shanghai exchange, a 250% increase in new accounts. That's an average of about 7,000 a day, a flood of fresh blood from san hu (as the Chinese call small investors) that is making seasoned traders nervous. "When you see shop assistants and taxi drivers racing out to borrow money to buy stocks, you've got trouble," says commodities guru Jim Rogers. "That's the market sucking in a whole lot of neophytes priming to get slaughtered."
Plenty of stock analysts and fund managers disagree, arguing that prices are simply keeping pace with China's remarkable economic rise and that accounting reform and better supervision have made Chinese companies more attractive. The country's GDP grew 10.7% last year, the highest rate since 1995. But the alarm is being sounded by Beijing officials, who are worried there could be another Chinese market meltdown like the one in 2001 that soured the public on stocks for years. On Dec. 30, Cheng Siwei, a vice chairman of the National People's Congress, cautioned investors against "blind optimism" in the country's relatively underdeveloped capital markets. China Central Television, the government TV network, last week aired a show warning citizens not to put up their homes as collateral for loans to buy stock. Authorities are doing more than jawbone. Bank lending for stock purchases was banned last month, and regulators temporarily halted the sale of new mutual funds.
Beijing may have good reason to apply the brakes. In frothy markets, investors tend to form unrealistic expectations. They buy into an ill-founded theme, whether it's about future demand for tulip bulbs or, in this case, the notion that China's economic growth is boundless. David Webb, an independent investor based in Hong Kong, says that this is what's happening with many China stocks. "Once you get past the hubbub, the fundamentals behind these prices just aren't there," he notes.