Investors crave stability as Shanghai stocks rocket

SHANGHAI: Chinese shares have soared nearly 80 per cent this year, dwarfing New York's 5.5 per cent rise, but investor Wu Jianshan says he would trade Shanghai's swings for Wall Street's stability.

The 60-year-old retiree switched to cheaper cigarettes as Shanghai's market nose dived last year, losing 65 per cent of its value. By the time his losses hit 50,000 yuan - double Shanghai's per capita annual income - he could not afford to smoke.

Unlocking his bicycle outside a Dong Hai Securities office, the former factory worker said Shanghai's current stock market boom allowed him to win back all of his 75,000 yuan investment. As he spoke, his clothes gave off a strong smell of cigarettes.

"Here in Shanghai the market rebounded faster than any other country," Wu said. "But we need to take into account how much it fell from its peak ... I would prefer Wall Street where the market fluctuations are not that big.

" China's surging markets were backed by the country's improving economic fundamentals in the first half of the year, state media quoted the chairman of the China Securities Regulatory Commission Shang Fulin as saying last month.But with Shanghai shares trading on average at about 40 times greater than their earnings per share, analysts are sceptical.

"I don't how much fundamentals actually play into these surging stock prices," said Sherman Chan, an economist at Moody's Economy.com.Sentiment and bets on what the government will do next pushed the market to recent highs rather than companies' balance sheets.

"Our stock market is very dependent on government policies," said 32-year-old investor Wang Yi.China's economic stimulus measures and the accompanying record 7.4 trillion yuan in new loans extended in the first two quarters also helped inflate prices as money meant to help the real economy was diverted into stocks and property for quick profits.

Hoping to soak up the flood of cash by increasing the supply of shares, regulators ended a nine-month moratorium on initial public offerings last month.But on July 29, the same day Shanghai was home to the world's largest stock offering in 16 months last week, state media reported state-run banks would rein in lending.

The news set the Shanghai Composite Index falling as much as 7.7 per cent before closing down 5 per cent - the biggest single-day fall in eight months.That evening the central bank announced it would maintain a loose monetary policy and the market quickly recovered to hit a new 14-month high.

"This sequence of events makes the Shanghai market look almost totally a confection of the government's making," wrote John Authers, the Financial Times investment editor.But Beijing's strict controls on money flows mean Chinese investors wanting to buy stocks have no other option.

For Wu, the rollercoaster sessions served as a reminder."I don't believe in long-term investments anymore. I was so scared by last year's fall," he said. "The market can change direction any day. The government just has to start tightening loans." - AFP