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July 31, 2009

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Home » Opinion » Chinese Views

Climbing back onboard stocks roller-coaster and hoping they won't fall

I don't know how many of my friends have the courage to take a roller-coaster ride in an amusement park. But I assume most of them do as they dare put their money in the world's most volatile stock market.

It really sounds miraculous that the worst-performing equity market in the globe in 2008 has turned to be the best so far this year. As share prices rise, the once-heartbroken Chinese investors are falling in love with stocks again.

What reassures investors most is an easing monetary policy that the central bank has pledged to stick to. Many newly extended bank loans in the first half have been channeled into the stock market.

Another piece of encouraging news is that China finally resumed initial public offerings after a 10-month hiatus. Instead of taking its negative side of draining liquidity, retail investors are crazy in subscribing for new shares and betting on sizzling first-day gains.

Shares of Sichuan Expressway Co, which launched the first Shanghai IPO in 10 months, more than tripled on its debut this week.

Millions of newly registered stock investors are tapping into their cash piles to book a seat on a new roller-roaster ride. More than 560,000 investors opened new stock accounts last week, the biggest weekly gain since January 2008.

A well-known quote made by Chinese economist Wu Jinglian several years ago says the country's stock market was just like a casino, or even worse than a casino where players were not able to see each other's cards while some powerful stock investors could.

As regulators have done a lot in the past two years to battle manipulation and price rigging, irregularities in the market have been reduced by some extent. But to me, it's still like a casino, as least in terms of investor mentality.

Mr Chen, my next-door neighbor, is busy these days with his stock investment. The market veteran, who late last year pledged to quit "forever" after a sharp correction, said he didn't have time to play his favorite mahjong for the past month.

In recent days, Mr Chen usually arrives at the brokerage outlet at 9am, half an hour before the market opens, to share his "secret tips" with other investors. At 9pm almost every day, he visited me at my home and asked whether his picks that day were right.

When I warned him against potential market risks, the 56-year-old retired technician shouted, "Can't you see China's economy is recovering? Come on. It's time to make money again."

Actually, a raft of my friends share Mr Chen's enthusiasm. Those posting blistering gains in a 2007 bull run but losing even more last year are coming back again. Their dreams of buying housing with gains from stocks have been revived.

The question is, if you were to earn enough money to buy a 70-square-meter flat, would you have the determination to sell all your lucrative holdings and vow never to play the game again? I can hear you murmur, "Just wait for two more weeks and I will make it 80 square meters."

Apparently, a new wave of asset price bubbles is building up both in the property and stock markets. And the bubbles will eventually burst after inflation returns and the government goes back to tightening.

As people's greed to make quick money grows, so does volatility. But the market itself doesn't generate anything. Those people chasing companies with wild price movements without looking at corporate fundamentals will finally be left high and dry.

For investors who experienced the 2007-2008 roller-coaster ride, it seems that once onshore, they pray no more. They never really abandon their dreams of becoming wealthy all of a sudden through stock investment.

The risks in this mentality are far bigger than those technical risks in the market. I don't like to call the market a casino, but many people do gamble in it and as the game rules stipulate, most of those making speculative investment are losers in a long term.


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