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China's Quirky Stock Market Finally Matters
An investor checks stock prices on a board in Shanghai on Friday, when the benchmark index gained 1.2 percent after significant losses early in the week.
(By Eugene Hoshiko -- Associated Press)
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"There is a degree of interconnectedness among companies and parent companies and stockbrokers and securities companies that really is pretty much without parallel. There is a possibility for insider transactions is much greater in China than most places," said Barry J. Naughton, a professor of Chinese economy at the University of California at San Diego and a contributor to the Hoover Institution's China Leadership Monitor publication.
Still, UBS's Anderson said many investors stay in the stock market knowing full well that the system and companies may have some problems.
Take the case of Worldbest Pharmaceutical. Or that of Pudong Development Bank. In June, the bank announced that it was duped by a customer who used fake identity papers to apply for 126 million yuan in loans that he used to buy 91 luxury properties that had since fallen in value. Then, in September, it discovered that 12 bank employees from its wealth-management operations had misused 73 million yuan.
Share prices fell briefly after the two announcements but quickly rebounded. Today, the stock is up more than 140 percent from when first announcement was made, closing at 21.95 yuan a share on Friday.
Shanghai-listed Sichuan Mingxing Electric Power has been informing shareholders that its biggest shareholder, Zhou Yiming, had been effectively embezzling hundreds of millions of yuan in company assets by pledging them against loans. But the company's stock has soared 81 percent from 3.66 yuan a share since January 2006, when the company warned the scandal would affect its bottom line, forcing it into the red.
On Internet bulletin boards for the three stocks, investors dissect the companies' troubles but then say they will hold or buy anyway. One reason is optimism that China is growing so fast that any stock whose value depends on Chinese consumers -- medicine, banking services, or energy -- can only go up. Then there's a sense among some investors that if things go wrong the state will bail them out.
For example, Worldbest was flagged for "special treatment" by the stock exchange in April 2006. That is usually bad news, that trading may be suspended or that the stock may be delisted. But Worldbest investors figured that it meant the state had become aware of the company's problems and was preparing to step in. They took it as a buy signal.
"It's a recognition of reality that the Chinese government has the ability to move these markets. Nobody doubts that," Naughton said. But faith that the Chinese government, despite its deep pockets, will always be around to help is misplaced, he said. "They may have the ability to make the markets go up. But they don't have the ability to make them go up forever."
Researchers Catherine Matacic in Beijing and Richard Drezen in New York contributed to this report.
