A Market Mood Swing

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Whether the market malaise will frighten others into the same decision is uncertain. Chinese have few investment options — real estate markets are frothy in major cities and interest rates paid on bank deposits don't even keep up with the country's rising inflation rate. People were still pouring into the market a few months ago. In August, about 4 million new trading accounts were opened, but the numbers have been falling since, according to stock exchange officials in Shanghai.

A rush for the exits could pose problems for China's economy. According to a recent study by Merrill Lynch, China's investor class — an estimated 150 million people — has sunk 22% of its capital into the stock market, compared with 8% two years ago. Shanghai-based economist Andy Xie calculates that if the stock market drops by half, urban households will lose about 20% of their overall net worth, putting a dent in consumer spending. Overall, economists figure that a 50% decline in equity values might lop 1-1.5% off China's double-digit GDP-growth rate.

Of course, it's impossible to predict where China stocks are headed. The Shanghai index quickly rebounded from a scary one-day plunge of nearly 9% on Feb. 27. But recently, the warnings that shares are overvalued have become difficult even for inexperienced investors, accustomed to quick scores and relentlessly rising share prices, to ignore. Last month, a top official at the China Securities Regulatory Commission, Tu Guangshao, said investors needed to "educate themselves" about market risks. "Some sort of correction was inevitable, and it's probably here," says economist Xie. Although many investors believed the government would do nothing to damage confidence in stocks before Beijing hosts the 2008 Olympics next summer, that belief has proven to be unfounded. In recent weeks, regulators ordered commercial banks to freeze lending activities through the end of the year — a major step calculated to curb the country's overheated economy that could have a knock-on effect on share prices.

Such actions are blows to even the most optimistic. So is the growing realization in Shanghai trading rooms that China is part of a global economy that could be in for a rough patch, due to the subprime-credit crisis and the possibility of a recession in the U.S. A month ago, a relatively sophisticated investor such as Tian brushed aside any suggestion that U.S. markets, in turmoil since August, could effect equity values in China. "We're a separate market, a separate economy," Tian said on Nov. 5. Today, he concedes that the connection might be tighter than he imagined. "People are saying that if the U.S economy slumps it will hurt China — that is on the market's mind," he says. As if to reinforce the point, the government on Nov. 15 issued a report warning that a U.S. recession could be "devastating" to China's manufacturing sector.

Tang, the 27-year-old bedroom trader, is getting an education. He won't say how much he has lost in the market recently, but after three straight down days ending Nov. 19, he conceded that "it's possible" China might be experiencing the beginning of a bear market. "The market will come back — at some point," he says. But, prodded by his wife, he is now surfing online job sites for employment leads. He'll soon be working for a salary again. "Maybe [day trading] wasn't such a good idea," he says. "It was nice not to have to worry about having a boss. But it's over."