By Eadie Chen - Analysis
BEIJING (Reuters) - Beijing pawnshop owner Xu Wei is rushed off his feet as people flock to his gleaming store, pledging cars, valuables and even houses in exchange for quick cash to bet on China’s booming stock market.
“The stock market is so bullish. The money people make each day on the stock market is much, much more than the interest they pay to us,” said Xu, who lends at up to 10 times the official bank rate.
That’s what has policymakers nervous. Days after calling the market a bubble, Central Bank Governor Zhou Xiaochuan raised deposit rates on Friday to try to staunch a flood of money out of bank accounts and into equities.
But the higher rates are no deterrent given that China’s main stock index has more than tripled in 18 months and is up 55 percent since the start of 2007.
If you don’t have cash in the bank to start with, you can probably borrow it. Chinese banks are prohibited from lending money to buy equities, but there are big loopholes.
Some big banks have signed pacts with state-owned companies enabling staff with secure jobs to take out unsecured loans of as much as 200,000 yuan ($26,300) for up to a year, bankers said.
Hua Chao works for one such firm. He borrowed 150,000 yuan from a bank last week and quickly moved it into his brokerage account.
“I only need to pay 9,000 yuan interest for the loan I got, but I think I can make at least 70,000 yuan a year by investing that money in stocks,” Hua, an office worker, said.
“So why not? I see almost no risk.”
Investors without easy access to bank credit or with nothing valuable to pawn can always turn to friends or relatives.
Yan Dong, who works in an advertising agency, borrowed 200,000 yuan from his parents-in-law and cousins in February.
After two and a half months of successful punting, Yan had doubled his money. He paid back his relatives and is now playing the market with 200,000 yuan of his own cash.
Hua and Yan are just two out of millions of people who have been swept up in China’s stock market frenzy.
At last week’s African Development Bank meeting in Shanghai, some young Chinese reporters paid more attention to fast-moving stock quotes on their laptops than to ministerial speeches.
Laid-off workers have become day traders, glued to big screens at smoke-filled city-centre brokerages. Foreign students, trading through their Chinese friends, are dabbling.
State media reported that some companies in Shanghai are even setting aside an hour every day for employees to trade shares.
Chinese investors tend to buy the market, rather than particular sectors or stocks, and more than 78 percent of all A shares have doubled in price since January 4.
As befits a feverish market, retail investors like smaller, speculative stocks. Blue-chips, by contrast, have been relative laggards.
Zhejiang Hangxiao Steel Structure Co. (600477.SS) shares have risen eightfold this year to 26.09 yuan despite it being fined for improper disclosure of big contracts from Angola.
Consumer stocks are hot -- LMZ Co. (600249.SS), a toothpaste maker, is up fivefold. Other big gainers are Jilin Chemical Fiber Group (000420.SZ) and transport firm Shanghai Ba-shi Group (600741.SS), up more than four and five times respectively.
Official figures show nearly 99 percent of China’s 90 million brokerage accounts are held by individuals, accounting for almost 60 percent of the $2 trillion capitalization of the domestic A-share market.
As separate accounts are needed for the Shanghai and Shenzhen bourses, there might be 50 million individual investors in all, said Zhu Jianfang, an economist at China Securities in Beijing.
With several family members probably standing behind each account, Zhu estimated that at least 12 percent of China’s 1.3 billion people now have a stake in the stock market’s health.
Yu Yongding, a former central bank adviser, calls this the “sheep flock effect”.
“Once the stock bubble bursts, it will have an immeasurable impact on the economy and social stability,” Yu wrote in Monday’s China Securities Journal.
China’s market is now worth more than 70 percent of its gross domestic product, well above its 2001 level of 15 percent.
However, the pain would be concentrated among small investors, especially those from the most vulnerable groups such as farmers, cooks and factory workers, he added.
A crash would also mean a new crop of bad bank loans.
“I think an impressive proportion of bank loans must have been used to punt on the stock market, although it is hard to measure exactly how much,” said Yuan Dejun, an economist at China Galaxy Securities in Beijing.
Despite the growing worries and the central bank tightening, the main Shanghai index .SSEC scaled new heights on Wednesday, gaining 1.18 percent.
“I‘m pretty sure that the boom will last at least until the Olympic Games are over next year,” Hua, the office worker, said.
“That’s been the experience of other countries. So I can’t be so stupid as to waste this chance. It won’t come again.”