Shanghai Stock Market Enjoys Record Growth

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New figures released Thursday show China's economy grew 10.7 percent in 2006, the fastest rate in more than a decade. And its stock market is witnessing a record-breaking bull run. Murmurs of a bubble are growing, with foreign brokerages warning investors to stay away. But local investors are still pouring money in.

STEVE INSKEEP, host:

Now the stock market in China is going through a record-breaking bull run. Warnings of a bubble are growing with foreign brokerages warning investors to stay away, yet money continues to pour in.

NPR's Louisa Lim reports from Shanghai.

(Soundbite of machine beeping, crowd chatter)

LOUISA LIM: This is the sound of fortunes being lost and made. Inside a security brokerage, shares are being bought and sold as people tap their transactions into computers. Shanghai's benchmark index is rising at a sizzling rate - 130 percent last year, compared to the Dow Jones, which climbed only 16 percent. Among the investors here is a 74 year old, wearing a woolly hat, padded boots and spectacles mended with sticky tape. He gives his name as Mr. Wong(ph). And he seems to relish talk of a bubble.

Mr. WONG: (Through translator) It's basically gambling. Company reports are unreliable. There's a lot of misinformation. If there was no bubble, there would be no investors.

LIM: And the scene here resembles nothing more than a senior's club. Old ladies knit as they track the flickering numbers. Others sip tea. As China's stock markets climb, new money is flooding in. Everyday this week, 90,000 new trading accounts were opened. Tan Sung Gang(ph) was among the first batch of investors to plow money into China's market in 1994. He fears these new investors are riding for a fall.

Mr. TAN HUNG GANG: (Through translator) These new investors don't analyze the fundamentals. They just know it went up today, it's going up tomorrow. They just rush in blindly. But you can't work the stock market blindly.

LIM: He expects turbulence ahead. And there are signs the regulators are worried, too, issuing a series of warnings. China's security general says it's becoming a consensus that a bubble is inevitable. But not everyone agrees. Before this, share prices had spent five years in the doldrums, as China's communist leaders grappled with much needed stock market reforms.

Peter Alexander, from research specialist Z-Ben Advisors, says finally, the mood has changed.

Mr. PETER ALEXANDER (Z-Ben Advisors): What we've seen is that investor confidence has returned, and that bank deposits right now are very low in terms of what you can get from interest. You get about 2 percent. So, this offers a real, viable alternative. So, I don't think it's a bubble in the strictest sense of the terms. Do I think that the market may have gotten ahead of itself? Yeah, probably.

LIM: Others have doubts about the very nature of China's stock market.

Mr. ALEXANDER: To me, it is still a fake market in the sense that it doesn't match the Chinese economy, which is increasingly in the hands of entrepreneurs. And the market is still primarily in the hands of the state.

LIM: Andy Rothman is a China strategist at the investment bank CLSA. He says the government needs to speed up its reforms.

Mr. ANDY ROTHMAN (China Strategist, CLSA): What you've got in China, in effect, is the world's largest communist party betting its future on the success of the private sector - entrepreneurs. Yet they don't have access to the stock market or the banking systems. So that be can't payoff unless these changes are made. So I think the odds are good. The only question we don't know is how long is that going to take?

LIM: A word of advice from the analysts. It's dangerous to bet against China. Today's statistics show China's economy is still growing faster than expected. If it continues to grow at the same rate, China will be the world's third largest economy as early as next year.

Louisa Lim, NPR News, Shanghai.

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