China bursts share bubble
Saturday 07 June 1997
The stockmarkets in Shanghai and Shenzhen slid sharply yesterday, as investors digested the announcement giving banks 10 days to sell any shares they hold, banning any further purchases and curbing lending.
For six months, the Chinese authorities have been struggling to rein in stockmarkets where many share prices have lost touch with reality.
The shock treatment started last December, with a warning in the People's Daily that share price levels "make us think of the stock crash in America in 1929". A daily limit of 10 per cent was imposed on share price movements.
That failed to have an effect and between January and May this year the domestic markets gained a further 50 per cent, fuelled by individual investors and state institutions illegally putting money that was often borrowed into the markets.
Last month, another raft of rules was announced, aimed at stemming those funds by curbing share-trading by state-owned and listed companies.
Apart from instability in the financial system, the Chinese government fears any "correction" to the frothy market would leave many private investors badly burned and very angry.
The private Chinese appetite for shares remains huge, and the governor of the People's Bank of China, Dai Xianglong, this week estimated that small-scale investors had pumped 60 billion yuan (nearly pounds 5bn) into the two domestic stockmarkets since the beginning of 1997. Some 4 million new private investors opened accounts during that period, bringing the total to around 25 million.
Mr Dai repeated that prices had been going up too fast. "When the market grows too rapidly, it becomes a bubble market," he warned.
Market regulators have repeatedly tried to stop banks lending to state- owned enterprises and securities firms, knowing that they would use the money to play the markets. The new measures, if enforced, should dry up a large part of the funds available.
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