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Irrational enthusiasm prevails in stock market

(China Daily)
Updated: 2007-04-16 10:33

The Chinese stock market has shrugged off all tightening measures the macroeconomic policymakers have taken so far this year. Even last Friday's drop in China's main stock index that ended a nine-day rising streak seemingly can do little to cool investors' optimism as the market keeps rising to all-time highs.

While enhancing scrutiny over listed companies and speculative activities in the market, the authorities need to do more to address the underlying causes behind current investment enthusiasm that borders on the irrational.

A long-awaited pullback may be just around the corner after many investors reaped spectacular gains in recent weeks. The benchmark Shanghai Composite Index reached the 3,500 point level last week, up 22 percent from the end of February when a sharp drop temporarily shocked investors at home and abroad.

The returning upward acceleration of the main stock index, which more than doubled last year, has convinced many individual investors to believe that the market will remain bullish even if corrections take place. Such optimism blinds them from the growing risk of increased market volatility.

The China Securities Regulatory Commission, the market watchdog, has increased its aggressive supervision this year by investigating abnormally sharp price movements of some listed companies.

These efforts are certainly needed. They work toward standardizing the practices of listed companies for the long-term healthy development of the stock market. This also makes individual investors aware of the reality of corporate governance in the market.

Yet, case-by-case efforts alone are not enough to caution investors against broad risk. The fact is that dramatic rises in the price of many Chinese shares have far outpaced their fundamentals.

With the market awash in new money and mutual funds attracting huge amounts of fresh investment, share prices can keep climbing to fuel asset bubbles that will threaten the country's financial stability.

In a sense, the current glut of funds in the market stems from lack of investment choices for Chinese. The current interest rate on savings accounts remains too low to stop the public from withdrawing money from banks to invest in the stock market, regardless of risk.

The People's Bank of China, the nation's central bank, has clearly expressed concern over stock prices. If low interest rates keep pumping more savings account cash into the red-hot stock market, the central bank needs to implement bolder monetary measures to prevent both inflation and possible stock bubbles.