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Will China stocks crash? Chatrooms may hold key

SHANGHAI (Reuters) - Shortly after midnight, a Chinese investor calling himself "I Love Italy" predicts on an online chatroom that shares in mid-sized builder CN Metal Engineering 000758.SZ are about to triple.

A man checks stock movements from an electronic board at a stock exchange in Wuhan, capital of central China's Hubei province, May 23, 2007. Postings on popular online chatrooms are a key source of investment tips for millions of Chinese retail investors entering the red-hot market and keeping the bull run going. REUTERS/Stringer

Another investor joins in, saying, “I will never sell the stock until it hits 80 yuan”. Next morning, the firm, which has been talking about an overseas contract, shoots up 10 percent to its daily limit of 32.64 yuan.

Such postings on popular online chatrooms are a key source of investment tips for millions of Chinese retail investors entering the red-hot market and keeping the bull run going.

Individual investors take up roughly 80 percent of trading, so gossip and opinion in the chatrooms can determine the course of the market more than recommendations by brokerage analysts or even statements by policy makers.

“The market is heavily driven by retail investors now. This is people’s power,” said a top Chinese fund manager.

Chinese investors get their stock information from various sources, including a thriving financial newspapers, television and radio, and company statements posted on exchange Websites.

But corporate disclosure is erratic, while some investors feel the government-backed media do not always tell the full story. And chatrooms often react faster to events than other media.

It is probably no coincidence that China’s greatest-ever stock bull market is coinciding with an explosion of Internet use in the country. China has more than 140 million Internet users, the world’s second-largest online community.

Last Thursday, after former U.S. Federal Reserve chairman Alan Greenspan warned investors China’s market was dangerously overheated, stocks initially slipped.

But they began recovering within hours as a stream of chatroom postings -- many of them taking a nationalist tone -- argued that Greenspan did not understand the ample supply of funds in China’s market and the country’s long-term potential.

PEOPLE’S POWER RULES

“A lot of foreign investors missed out on the rally from 3,000 points, now they are trying to talk down the market. This is apparently a plot!” said an investor calling himself “Bao Luo” in a posting on Sina.com.cn.

“So we can reach a conclusion: the 4,000-point level is just the start of another big bull run.”

The benchmark Shanghai composite index .SSEC surged 2.11 percent to an all-time closing high of 4,272.111 points on Monday, nearly quadrupling from the start of 2006.

A posting on another website read: “All Chinese compatriots must not let themselves fall into the trap of foreign speculators.”

In the case of CN Metal Engineering, there are reasons to be bullish. The company said this month it had signed a preliminary agreement to undertake work on a $3 billion construction project in Saudi Arabia.

But the company stressed it was not sure whether it could sign a final contract, while there was no word on how much of the $3 billion would be sub-contracted out to other firms -- points which were barely mentioned in the chatrooms.

In recent weeks, the China Securities Regulatory Commission has warned individual investors of the risks in the market, and urged brokerages to educate clients about cautious investment.

But there has been little if any official effort to regulate content in the investment chatrooms, even as the government actively suppresses political dissent and pornography on the Internet.

Some chatroom participants clearly want to inject more rational analysis into the debates.

When a series of postings claimed a sell-off of China’s foreign currency B shares last week was a plot by overseas investors, a user identified as “121 205 2” protested.

“This is a stupid theory. Renminbi appreciation is a long-standing trend. Think about currency losses. Why should we buy B shares now? Haven’t you studied macroeconomics?” he wrote.

But the majority view evidently won out. Shanghai's B-share index .SSEB soared 16 percent over the two days through Monday.

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