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Don't empty wallets to ride the bull market

By Qi Jingmei (China Daily)
Updated: 2007-05-24 10:44

Two developments in the economy are worth our attention: The increase in bank savings keeps slowing. A large amount of capital keeps pouring into the stock market.

Bank savings have been sharply rising over the last decades. But a brake seems to have been put on the increase late last year. Moreover, the long-term increase in bank savings continued to drop in the first fourth months of this year.

In April, for example, general bank savings in renminbi rose by 444 billion yuan ($55.5 billion), 13.3 billion yuan ($1.74 billion) less than the same period last year.

It is the excessively prosperous stock market that has siphoned off individuals' bank deposits.

According to the estimates of the Shanghai branch of the People's Bank of China (the central bank), more than 70 billion yuan ($8.76 billion) of deposits drained from Shanghai's commercial banks to the capital market in the first four months of this year.

At the same time, fixed saving deposits in the financial institutions in the city decreased by 9.06 billion yuan ($1.13 billion) under the influence of the increasingly booming stock market and the issuing of still more new shares in April.

Of the capital flowing into the stock market, an overwhelmingly large proportion belongs to individuals.

For instance, 160 billion yuan ($20 billion), out of the total 250 billion yuan ($31.25 billion) that flooded into the stock market in April came from individual investors. The rest of the 83 billion yuan was from institutional investors.

In a matter of just a few months, individual investment has become the mainstay of capital newly pouring into the yuan-denominated A-share market.

It is understandable that individuals shift their bank savings to the stock market in the context of negative profits yielded from bank account interest, the very limited investment options and the continuing boom of the stock market.

But one must be clear about the fact that risks are ever lurking on the capital market.

Lured by the prospect of making big money quickly, some people have mortgaged their houses to raise money for stock investment.Some pour in money which should be spent on life insurance and social security insurance.

All this only serves to increase the potential risks.

Since the beginning of this year, the stock market has been expanding at an unprecedented pace.

As of May 8, for example, the stock exchanges in Shanghai and Shenzhen had 94.36 million accounts, of which 93.95 million were individual accounts. The number of new accounts reached 156.29 million, three times that of last year.

By May 11, the total value of the Shanghai and Shenzhen stock exchanges had reached 16.89 trillion yuan ($2.11 trillion), equal to 85 percent of the country's GDP last year.

The Chinese stock market is expanding at a pace unseen since the market was first established on the mainland.

Two primary factors can be attributed to its record-breaking growth.

First, the share-merger reform, which converted State-owned non-tradable shares into tradable ones, has been steadily pushed since late 2005 and, as a result, major institutional obstacles to the smooth circulation of shares have been removed. Consequently, stock market operation has improved and investors' confidence in the market has increased.

This facilitates the forming of an orderly, healthy and speedily developing domestic stock market.

Second, rapid economic growth and the limited investment options available to the public are another contributing factor.

The country has seen double-digit GDP growth over recent years. As a result, people's income has increased steadily and significantly, especially that of the middle class.

This means that large sums of money needed to find an investment outlet.

With the limited alternatives, the stock market seemed to be an ideal venue for investment.

As a result, various kinds of capital from foundations, banks and individuals started rushing into the stock exchanges. Accumulated wealth exploded in the narrow investment venue of the exchanges. The result was the booming domestic stock market.

Investors need to regain sobriety in the face of the market binge. Something normal no doubt is behind the prosperity, but speculative factors should never be overlooked.

When a market crosses the boundaries of rationality, risks are brewing.

In the opinion of this author, the government should rein in the wildly prosperous stock market, restrict overly speculative acts, and channel the market into an avenue guided by investment rules so that the market's growth is healthy.

The author is an economist with the State Information Center