Fears Rise of Chinese Stock Implosion

Former Federal Reserve Chairman Alan Greenspan has warned of a dramatic correction in China's exchanges that would send shockwaves through the U.S. and world markets. But in Shanghai and Beijing investors have shrugged off concerns and are still pouring cash into precarious markets.

On Friday, China's benchmark Shanghai Composite Index gained 0.7 percent to 4,179.78, its highest closing level.

And with the index up 56 percent so far this year, following gains of 130 percent last year, investors are undeterred.

But industry experts fear that the booming Chinese stock exchanges could see their lengthy rally come to an abrupt halt by events such as a slowdown in exports and profits, the Organization of Economic Co-operation and Development (OECD) cautioned.

That is why high share prices pose a risk to stability.

The concern was evident at a downtown brokerage recently, as throngs of people, including many first-time investors, watched the Shanghai Composite Index scroll across the big screen.

Despite instructions from China's Securities Regulatory Commission that brokerages warn newcomers about the risks before they open new accounts, little has dampened investors' enthusiasm.

It is the small investors taking big risks that is fueling the boom in China's stock markets.

"I've got nothing to do at home, so I figured, hey, I'll just take some idle money to invest," said Li Xiwen, a 57-year-old retiree who opened an account earlier this month.

Smoking a cigarette outside the brokerage in Beijing, Li said for him "it's not worth it to borrow money to trade stocks. If you pick the wrong ones, you lose your shirt."

Others, however, are not as circumspect about the ups and downs of the market.

At the Jinbao Pawn Shop, just down the block from the brokerage, 28-year-old shopkeeper Fan Miao said he gets customers who want quick cash to buy stocks.

"Some people have come to ask about putting up their homes as collateral," he said. "We try to talk them out of it.

"People mostly pawn stuff to raise cash in a pinch. If they play the stock market, they may not make enough to pay off the interest on what we loan them," he said.

The official China Economic Times published a survey of office workers who invest that showed 60 percent made the equivalent of less than $400 a month. Half of the respondents said they were new to investing in the markets and understood little about them, while 73 percent said they are playing the market with their household savings.

Analysts are concerned that these investors ignore explosive fluctuations in the markets, as well as the government's attempt at cooling them.

"(They have) been trained to see every decline in the market as a buying opportunity, and that's really scary," said Michael Pettis, a visiting economist at Beijing University.

Pettis notes that on May 18, Beijing tried to cool down its markets by raising interest rates, widening its currency's trading band, and requiring banks to keep more money in reserve.

"One of my worries about this move is that it's going to have no impact ... undermining further any belief that the government has control over the markets," Pettis said.

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