MELISSA BLOCK, HOST:
The Shanghai stock market is on a roll. The index has nearly doubled in the past year, even as China's once-turbo-charged growth continues to cool. So what gives? NPR's Shanghai correspondent Frank Langfitt explains.
FRANK LANGFITT, BYLINE: On weekend afternoons, hundreds of people come to downtown Shanghai, just across the street from People's Square, to trade stock tips. And right now I was just talking to a guy named Shen Yuxi. He's got two laptops, and he's got a flat-screen TV. And he's showing people how to invest in the market.
SHEN YUXI: (Foreign language spoken).
LANGFITT: "When a Communist Party chairman takes office," he tells me, "I buy stock in companies from his hometown. Xi Jingping is from Shaanxi Province, so therefore I buy stocks in Shaanxi. After all, the party chairman is the country's highest official. This is the simplest rule of investing. You'll always win." Shen sells a homemade DVD filled with theories he says he learned studying Warren Buffett, whose face adorns his business cards. Shen fires off pitches for companies like machine-gun bursts. His crowds spill out over the sidewalk to listen.
(SOUNDBITE OF CROSSTALK)
LANGFITT: Across the street, beneath a maple tree, is Li Jingfei. He's quietly pitching another theory, based on "I-Ching," a classic Chinese text originally used to predict the future.
LI JINGFEI: (Through interpreter) Traditional Chinese culture has a history of more than 2,000 years. The "I-Ching" is a summary of laws that dictate the formation of the universe. Everything's development needs to conform to this set of laws.
LANGFITT: "Including," Li says, "Shanghai's stock market." Li's ideas for investing aren't the most imaginative. There's yet another guy who insists he can pick winners based on the theories of Mao, who, incidentally, didn't like stock markets - let alone capitalism.
GAN LI: China's stock market's typically not driven by fundamentals. It's driven by people's perception.
LANGFITT: Gan Li teaches economics at Texas A&M. He says several things are driving up stocks here. With housing prices in decline, people are pouring cash into the market. And despite sagging GDP growth numbers, people generally support President Xi Jinping's policies and are fairly optimistic about the economy. But there's another potentially worrisome factor.
LI: We find that new investors compared with old investors are much less educated. New entrants for the last half a year, they are middle school-educated people.
LANGFITT: The market is still well below record levels set before the global financial crisis. But Gan says if stocks continue to make big gains, a serious bubble could form, leaving ordinary investors, like the ones on the streets of Shanghai, vulnerable to sudden price drops.
LI: If they don't understand - fully understand - stock market, they may not be able to handle the risk that their living standard, lifestyle, will be severely affected.
LANGFITT: Retail investors buy and sell stocks using their own accounts. They make up a whopping 80 percent of volume on the Shanghai exchange, which is notorious for insider training.
ANDY XIE: I'm Andy Xie. I'm an independent economist. I comment on financial markets.
LANGFITT: Xie worries stock manipulators could target some of these mom-and-pop investors with pump-and-dump schemes.
XIE: You just keep ramping up the stock. You use like thousands of your own accounts, creating this fictitious trading volume. Then you have a lot of people watching. Eventually, one day they cannot help themselves anymore; they jump in. That's the time you're taking them to the cleaners.
LANGFITT: Back on the street corner downtown, stock-picker Shen says the Shanghai exchange has at least one saving grace. The government, which has enormous control over the market, can signal when prices rise too high, as they did in 2007.
YUXI: (Through interpreter) When the market is about to fall, they'll give you a hint. When the market hit 6,000, the government said even monks are opening accounts; you guys need to be careful. So everyone left the market.
LANGFITT: Well, not everyone... Even some officials didn't listen to the government - and paid for it. Frank Langfitt, NPR News, Shanghai.
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