David Barboza 
The New York Times
12 May 2006
International Herald Tribune
© 2006 International Herald Tribune. Provided by ProQuest Information and Learning. All rights reserved.

After sinking to an eight-year low last year and being declared all but dead by seasoned observers, the Chinese stock market has soared more than 50 percent over the past year. 

The powerful rally is the longest sustained rise in stock prices here in more than five years and is offering a glimmer of hope to investors who had been crushed by a longstanding bear market that somehow existed in the midst of the world's fastest-growing economy. 

Market analysts say stock prices in China are being swept up with other Asian financial markets because of huge inflows of cash, a result of strong global economic growth coupled with huge Asian surpluses in trade with the West. 

The Nikkei average in Tokyo is up 52 percent over the past year, and the South Korean stock index is up 55 percent. Stock prices in Australia have risen 31 percent over the same period. The Hang Seng index in Hong Kong is up 22 percent. And in India, some stock indexes have soared more than 95 percent. Even shares in Pakistan, the Philippines and Vietnam are soaring. 

The most surprising jump has come in China, where stock prices had fallen as much as 55 percent from their highs in 2001 despite the country's rapid economic growth. 

"We're awash in liquidity," said Jing Ulrich, chairman of China equities at J.P. Morgan Chase. "Since I started covering China in the early 1990s, I've never seen this level of interest." Market analysts say the rally could lead to a wave of mergers and acquisitions in China and set the stage for further important changes in the abysmal Chinese capital markets, including the development of financial derivatives. 

Trying to restore a sense of normalcy to a market that was heavily battered last year, regulators announced Monday that they would end a yearlong moratorium on new stock listings on the Shanghai and Shenzhen stock exchanges. More than 1,400 state-owned companies are listed on the exchanges. 

While many analysts cautioned this week that stock prices in China could sink again, several experts said there were signs that the market had bottomed out after a steep four-year decline. "In China, bank deposits equal 160 percent of GDP," Ulrich said. "That's $3.6 trillion in the bank. Imagine if there was an equity culture here and investors put just 1 percent of that money into the stock market." 

That would be a drastic turnaround from recent years. Investors have been selling shares here since late 2001, partly over concerns that prices rose far too rapidly in the 1990s. There have also been suspicions among investors that many listed companies were engaging in insider trading and fabricating financial statements. 

The plunge was devastating for millions of investors in China, some of whom had put their life savings into a market that was created only in the late 1980s. When their savings evaporated, many small investors vented anger at the government. In one case, a man protested by dousing himself with gasoline and setting himself on fire just outside the offices of regulators in Beijing. 

Worried that a steeper drop could fuel widespread public anger, the Chinese government has moved aggressively in recent years to restore confidence in the marketplace. 

Regulators have introduced dozens of changes meant to prop up prices, including allowing more foreign money to come into the stock market and announcing new financial reporting standards. 

Among the most significant changes, however, was the recent decision to transform previously untradeable government-owned shares into tradeable shares, making it possible for investors to acquire larger stakes in state-owned companies or to cash out more easily. 

But until recently, prices continued to drop in a market that many experts described as being dominated by speculators and more akin to a gambling den. Market sentiment has been so negative over the past few years that some of the biggest state-owned companies, including the major Chinese banks, have turned to the Hong Kong exchange for stock listings. 

The result, analysts said, was a crippled system that made it more difficult for state-owned companies to gain access to the public capital markets and placed greater burdens on the state- owned banking system to make big loans. 

"Last year 99 percent of the financing came from banks and 1 percent from stocks and bonds, and that is a very unhealthy way of financing," said Michael Pettis, an associate professor of finance at Beijing University. 

Now, the stock markets here are ready to resume listings. 

Yet many analysts continue to say that the Chinese stock market is overvalued. Some even contend that it was overvalued when it hit bottom last year. 

Financial experts say the more serious problem is that the market needs structural changes that would lure a more varied investor base, including long-term investors rather than simply speculators. 

Foreign investors are being allowed to invest more and more in the Chinese stock market. And that may have helped lure Chinese investors back for the current rally. 

Stock rallies here tend to create huge herds. 

"I think there's still a lot of Chinese sitting on the sidelines waiting to jump in," said Chang Chun, a professor at the China Europe International Business School in Shanghai. "But that could also create another bubble." 

Pettis at Beijing University said he believed the rally under way was mostly speculative. He said that until more significant structural changes were made, speculators would drive the Chinese market. 

"We've seen this before," he said, noting that the Japanese stock market rallied consistently after it began its steep decline at the end of the 1980s, only to fall even more sharply the next time around. "If this turns out to be a false rally," he said, "this wouldn't be the first time."