Taking Stock of China's Chaotic Market

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A 9 percent drop in the value of the Shanghai stock market earlier this week sent shudders through markets elsewhere in the world. Many factors make the Chinese stock market volatile, including the presence of small investors trying to get rich.

RENÉE MONTAGNE, host:

We go now to China. It was the nine percent drop in the Shanghai index on Tuesday that triggered the global slide in stock prices. NPR's Louisa Lim is in Shanghai. Hello.

LOUISA LIM: Good morning.

MONTAGNE: How does the market there look today?

LIM: Well, we really have seen a rollercoaster couple of days. Tuesday saw the biggest drop in 10 years, as you said, almost nine percent. Yesterday, we saw a recovery of almost four percent. And today the market was down again. It slid around three percent.

So basically, the market is yo-yoing all over the place. This comes against the backdrop of very, very high growth indeed, just to put it into context. Last year, the Dow Jones climbed 16 percent and was judged to have had a very good year. Now compare that to Shanghai in the same time, Shanghai's benchmark composite index rose 130 percent.

So some are saying it's only natural that with the market climbing so high for so long that people want to take their profits, and many analysts say the market had needed a correction.

MONTAGNE: Is that part of why China's stock market is so volatile?

LIM: Well, one of the main factors for the volatility is because 70 percent of the funds in China's market are from individual investors; only 30 percent is from institutional investors. And one of the reasons for that is just because there aren't very many places in China to park your money.

Deposit rates in banks are actually below the rates of inflation. So you can actually watch your savings lose money in real terms if you put your money in the bank. So that's led to a phenomenon that economists called excess liquidity. Stephen Green is a senior economist from Standard Chartered here in Shanghai and he explains just what that means in practice.

Mr. STEPHEN GREEN (Senior Economist, Standard Chartered): There's so much money in China. So, so much money sitting in China looking for assets, and there are only a couple of assets you can buy if you're a Chinese citizen. One's a house and the other's a store.

LIM: So that means that all sorts of people are dabbling in the market or even plunging all their savings into the market, even taxi drivers, hairdressers, secretaries, even old people. For example, when I went to the brokerage the other day, I met a 72-year-old woman who'd invested all her savings and all her pension - that's about $25,000 - in the stock market.

And she said the reason was because she needed more money to pay her medical bills and this was the easiest way that she could see to earn money very fast. And because there were so many small investors, that means the stock market is very speculative.

Rumors snowball, people will take all their money out on a whim and put it back in again on another whim, and that's really what we've been seeing the last few days.

MONTAGNE: And Louisa, some say China doesn't even have a proper stock market.

LIM: Yes. And that's really because the level of government involvement in the market is huge. It's still the top shareholder for most of the companies listed. And, in fact, the private sector only accounts for about 10 percent of the market capitalization. So there's a huge disconnect between what's happening on the stock market and what's happening elsewhere in the Chinese economy.

Yes, the last few days have really shown us the increasing importance of the Chinese market on world market. I mean, we saw how domestic rumors in China, this rumor about a capital gains tax, could end up shaking the whole world's markets. So as Stephen Green from Standard Chartered says, these few days are another sign that the center of gravity of global markets is moving eastwards.

Mr. GREEN: What happens in China is fundamentally much more important for the world economy than even a couple of years ago. Chinese inflation matters. If China's prices start to rise, then its export prices start to rise, and that might trigger global inflation. And Chinese demand for raw materials, that's driving commodity market at the moment. If there's one country in the world which is driving the world economy at the moment in terms of differences at the margin, it's China.

MONTAGNE: And again, that was Stephen Green, Standard Chartered Bank, senior economist in Shanghai and our correspondent, Louisa Lim. Thanks very much.

LIM: Thank you.

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