Is the Shanghai Stock Market Bubble Finally Bursting?

A customer strolls into a bookstore, goes the popular Chinese joke, and tells the salesperson: “I’m looking for a book with no killers, but much bloodshed; with no love, but great regret; with no spies, but constant paranoia. Can you make a recommendation?” Just one, the salesperson replies: The State of the Chinese Stock Market.

Then there’s this one about a Chinese investor: “In the morning, he watches the K-line graph,” which tracks the perambulations of a share’s price. “In the afternoon, he goes to the hospital to watch his electrocardiogram.”



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These are just two of many snippets of gallows humor widely shared in the dark days of the Chinese stock market. They have been few in number of late, but their impact has been keenly and widely felt. On May 28, the standard-bearing Shanghai Composite Index lost an astonishing 6.5 percent to fall to 4,838 points—by way of illustration, if the market fell at that rate for 12 days, which it almost certainly won’t, it would lose over half of its value. That plunge stands alongside another dip on May 5, 6, and 7, when the Shanghai index blipped lower, losing 8.5 percent of its value over three days. Even the smaller gyration in early May was severe enough to wipe out $1.4 trillion in paper value—meaning an average of more than $7,000 from each account holder—from China’s stock market, which was established in 1990 in the early days of the country’s economic reforms. It was described, at the time, as an “explosive fall” in Chinese press and social media.

Over the past six months, China’s capital markets have soared to heights not seen for years, enriching millions of savvy investors—not to mention pensioners, farmers, college sophomores, urban migrant laborers, and grifters peddling get-rich-quick schemes out of seedy bucket shops. As always, fear and greed are everywhere in China, but right now an impressive quantum of both are lodged in the country’s stock market, as citizens chase what looks like one of the last big chances to get rich fast before the country’s economy settles back to earth.

The latest bull market began with the cooperation of China’s massive, state-controlled media apparatus.

The latest bull market began with the cooperation of China’s massive, state-controlled media apparatus. An April 17 retrospective from Beijing Youth Daily, itself state owned, is instructive. Public opinion always “leads the markets,” the article wrote, a phenomenon particularly “prominent,” “targeted,” and “frequent” in the latest bull incarnation. It found the rumblings traced back to August 2014. With the index hovering around 2,400 points—a figure scarcely higher than that in August 2013 or August 2012—state agency Xinhua released a series of articles called “China Urges a Quality Bull Market.” (One Xinhua headline in September 2014 quoted a 45-year-old investor in Guangzhou stating, “I believe that a historic opportunity is coming.”) In early September, observers noted, Xinhua published eight articles on the stock market in the space of three days. By March 2015, with the index around 3,800, the Beijing Youth Daily opined, the market was suffering from “acrophobia,” which prompted state mouthpiece People’s Daily to issue a three article series, “A Share Volatility [Is Part of] a Slow Bull; [Index] Expected to Challenge 4,000.” A shares are the stocks sold to Chinese investors. It crossed that threshold on the second day of April.

Investors of all stripes have danced along as they (quite reasonably) seek new avenues for investment after China’s once-torrid housing market, a massive store of citizen wealth, slowed over 2014. The rush to buy into the rising market has become itself an object of breathless reporting. On March 30, the Beijing Evening News told of a white-collar worker shamed into opening an account after encountering successful small town relatives on a trip home for Chinese New Year. On April 25, Guangzhou-based paper Yangcheng Evening News reported on a new class of “stock market widows,” women whose husbands snub them to monitor the markets on their smartphones. A May 7 post on Xueqiu, a social media platform for Chinese investors with a name literally meaning “snowball,” exhorted readers to avoid comparing one’s gains to those of one’s neighbors. “In new media these days, some online gurus are showing off their short-term investment gains to demonstrate their preternatural ability.” That same day, a popular post on securities discussion forum ZQJJR referred to an unnamed woman who took out a $298,000 mortgage on her home and made $112,000 in just six months. Although the story was hard to verify, the post fretted about “aunties as a group,” who are “easily influenced in investment decisions” and tend to “blindly follow” others.

Young people are especially active in the current bull market, with over one-third of China’s 100 million-plus investors aged 30 or below. Many members of the country’s “post-90s generation”—people born after 1990—are reportedly borrowing money from their parents, or raiding their own scholarship funds, to play the markets. Not that attending university is a requirement for jumping into stocks. A late 2014 survey by the Southwestern University of Finance and Economics in Chengdu revealed that over two-thirds of new investors had less than a high school education.

There’s no stock analyst or securities agent, no matter how hard working, who can match one sentence uttered by the People’s Daily.

It doesn’t take an advanced understanding of finance to recall the deep, fresh scars crisscrossing the Chinese stock market. For all the talk about the Shanghai index’s march to 4,000 points and beyond, its peak came in October 2007, when it hit 6,092 after a dizzying, yearlong ascent. But by October 2008, it had bottomed out at 1,707. It recovered somewhat in the months thereafter, even crossing 3,000 on several occasions, but its mojo was gone. Starting October 2010, it began a long, slow slide. In September 2012, after the Shanghai index hit a 43-month low, social media was awash with comments referring to the stock market as a “meat grinder,” a “slaughterhouse,” and a “financial black hole.” Business publication Founder Magazine joked then that investors should be prepared to “go in as a BMW and come out as a bicycle.” Until the recent rally, prospects had scarcely improved.

The latest feverish rise of Chinese stock prices may have spooked Chinese officials, who surely favor a slow and long bull market to an effulgent but fickle one. On May 4, state mouthpiece People’s Daily tried to deploy just the right dose of cold water with a widely cited opinion piece, titled “Don’t Forget Risk in a Bull Market.” Tall tales “about every type of stock market ‘legend’ are either happening by one’s side, or are being passed around among friends,” the article lamented. About one million domestic brokerage accounts had been opened each of the past six weeks, the article noted, including 4.1 million in the third week of April alone, a historic high and triple the weekly record for new accounts opened during the 2007 bull.

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“There’s nothing wrong with trying to make money in the stock market. And the recent situations truly is a ‘golden period’ for making money,” the article assured readers. “But does that mean that everyone can easily make money there?” The article insisted that “a bull market does not imply that every listed stock is, at every time, an opportunity.” There are “things a new stock investor must know,” the piece counseled, like macroeconomics, the relevant policies, and the specifics of individual companies. “Even more difficult is managing your emotions.”

Sober advice like this is standard in every introduction to stock investing. But it was enough to cause an outpouring of emotion in Chinese media. On news portal Sina, commenters argued the Daily lacked the authority or expertise to opine on the ups and downs of equity markets. On social media platform Weibo, web users mostly cursed or mocked the paper’s editorial. “This article has caused so many to shed tears and go bankrupt; when times are sensitive,” one commenter wrote, People’s Daily “just randomly farts.” Another web user sneered the editorial was “very precise,” because “when you say it will rise, it rises; when you say it will fall, it falls.” One commenter observed the seemingly oracular power of state media: “There’s no stock analyst or securities agent, no matter how hard working, who can match one sentence uttered by the People’s Daily.”

It doesn’t take an advanced understanding of finance to recall the deep, fresh scars crisscrossing the Chinese stock market.

The outcry was sufficiently fierce that two days later, the Daily felt compelled to walk the editorial back, re-characterizing the dip as “an interlude in the Chinese capital market’s maturation process” and explaining the previous author’s argument as merely having “raised [the issue of] risk, and certainly not disavowing the bull market.” It complained that other media outlets had made a hash of the piece’s “moderate tone,” delicately upsetting the balance it had sought to create. “In the process of being shared, it’s been repeatedly cut and frequently tampered, ultimately altered beyond recognition.” Because platforms for “mobile dissemination” had character limits, the way in which they shared the piece engendered “Internet sensationalism,” ultimately “misleading readers.” The Daily lectured that “a reasonable market is inseparable from reasonable public opinion, and reasonable public opinion is inseparable from a reasonable media.”

In a true bubble market, of course, it’s hard for media to make a reasonable choice, given that the options are mostly either alarmist or boosterish. In a May 24 article for news portal Sina, the prominent economist Li Daokui took the first tack when he declared that “a new era of widespread stock speculation has arrived.” Li warned that “dancing aunties,” retired women who enjoy gamboling in public squares—now also cavorting in Chinese equity markets—often made the mistake of “entering a bull market, and dancing away from a bear market.” In other words, they buy high and sell low. On the boosterish end of the spectrum, a May 26 article syndicated by news portal 163 observed that the “unusually hot” market is now “a hot topic on every street and alleyway. When they see each other, friends don’t ask each other, ‘Have you eaten?’ Instead, they ask each other, ‘How much have you made [in the market] today?’”

In the wake of the latest plunge, Chinese authorities, at least in the relatively prosperous coastal province of Zhejiang, appear to have decided that boosterism will have to do. In an internal document, the first page of which an anonymous user leaked May 28 on Weibo—which appears authentic, but which Foreign Policyis unable to verify—Zhejiang’s propaganda ministry issued a directive to “news units” reporting on the stock market. “In order to spur the healthy development of the capital markets,” as well as “strengthen … the education of investors” and “support stable economic growth,” media must “increase positive reporting on the capital markets,” with a particular emphasis on government-led stock market reforms.

Those reforms are real, which is one reason Chinese authorities appear to believe that this time is different. Under President Xi Jinping, who took power in November 2012, the country has pushed through major policies aimed at putting China’s economy and government on firmer footing. There have been changes to the market rules themselves. In December 2014, for example, investors were allowed to purchase stocks on the Shanghai Stock Exchange on margin—that is, using borrowed money. In April 2015, a single investor was permitted to open multiple securities accounts. There have also been major, nationwide initiatives that may have riled animal spirits. Those include not only Xi’s crackdown on graft within the ruling Communist Party, which he has undertaken almost since assuming office, but more recent announcements like March 2015’s “Internet Plus,” an effort to promote e-commerce and Internet banking, and May 2015’s “Made in China, 2025,” a play to upgrade China’s manufacturing sector, especially robotics and high-end machinery, in the face of competition from other developing countries with lower labor costs. Officials refer to the fruits of their labors, economic and otherwise, as a “reform bonus.”

With China’s economy continuing to cool, few question that deep, liquid, and transparent capital markets will be necessary to position the country to move confidently into the future. They allow average Chinese people to buy into a broad set of companies, instead of the current prevailing choice between stashing money in state-run bank accounts returning rock-bottom interest rates and sinking most or all of one’s savings and excess income into a single home. That will unleash capital that has been dawdling in less productive places, and it will give firms a way to finance their investments and operations that don’t require recourse to big Chinese banks, which are known often to consider the political merits of their loans more than the creditworthiness of the borrower. The gains from the market might give middle-class consumers more cash to spend, and allow smaller and more innovative companies a way to get cash—two priorities the government has repeatedly stressed. In other words, capital markets are a vital support mechanism for the real economy—the workers that punch clocks, the companies that make products and provide services, the engineers and entrepreneurs who invent new products and launch new startups that make life easier and better. But it cannot be a replacement for any of those things.

Warner Brown contributed research and reporting from Shanghai; Zara Zhang, Shujie Leng, Bethany Allen-Ebrahimian, Zhiqiang Lin, and Yuxin Lin contributed research.