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View from China: Taking Stock

The Chinese people's embrace of the stock market tests the government's tolerance for criticism.

These days everyone in Shanghai seems to own stock shares, including my barber. A man in his late 60s, he owns a small shop in a part of Shanghai once known as the French Concession. A week before the big stock-market dive that hit the Shanghai exchange, he told me he had placed his life savings of RMB 50,000 ($6,519) into a single stock, China Citic Securities. When the share price for China Citic collapsed 20 percent, he seemed unfazed. The Shanghai stock market always goes up, he said. It would again.

Small retail investors are the driving force in China’s stock markets. Many are low-income workers, wholly unfamiliar with the complexities of stock markets but attracted by a market with a composite index that has grown almost 300 percent since 2005. They often bet their life savings on blind faith. Investors will buy shares in companies with auspicious-sounding names or with the numeral 8 — lucky in Chinese lore — in their ticker prices. Unlike my barber, many are enraged by the market downturn.

The target of their rage is the way the government, anxious to cool down the buying frenzy, handled the situation. Two days before a sudden threefold increase on the investment tax, an official strongly denied mounting rumors of a hike. Investors believed him, and kept buying and selling. When the tax was imposed on June 1, they fled en masse. The Shanghai composite index dropped about 10 percent in two days, at which point the government backpedaled. Another official stepped forward to criticize the official who had issued the original denial, saying he had no right to speak for the government. State-owned newspapers encouraged investors to stay in the market for the health of China.

The contradictory statements exposed the government’s ambivalence about bursting the bubble. One factor may be its fear of social unrest if shares decline too sharply. Another may be reluctance to spoil its own party. Official insiders at state-owned companies often deliberately set low prices for A-share stocks and snatch them up, expecting to see a big jump in value after the public offering.

The tempest over the stamp tax seems to be easing. At press time, the Shanghai composite index had regained almost all of its lost ground. What’s certain is that the incident has exposed a lively new constituency. Retail investors, it turns out, are uncharacteristically vocal in their criticism of the government, having so much to lose. In a society in which open debate about government action is a rarity and often punished, the government is tolerating the criticism and may even be heeding it. This can only be good.

Wu Chen is editorial director of CFO China.

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