China Investors Bet This Time Is Different in Stock Rally

Zhang Jun, a 40-year-old real estate researcher, vowed to never again trade Chinese stocks after losing thousands of yuan during the market crash of 2008. Now he’s jumping back in.

“This time, it’s different,” he said at a crowded China Galaxy Securities Co. outlet in Beijing’s Xicheng district.

President Xi Jinping supports rising share prices, while the market has “matured” after losses during the past five years erased more value from the Shanghai Composite Index than any other global equity gauge, according to Zhang.

“If Xi wants to realize the Chinese dream, he has to boost the stock market, which makes us ordinary people happy,” Zhang, who plans to make an initial purchase of about 100,000 yuan ($16,153) and is considering using borrowed money to amplify his wagers, said in an interview on Dec. 9. He said he wouldn’t be surprised if the benchmark index jumps to 10,000, or 231 percent above yesterday’s close.

Individuals are returning to China’s $4.9 trillion stock market at the fastest pace in seven years, fueling a world-beating rally that’s sent share prices to the highest levels since 2010. Interviews with Zhang and three other retail investors in Beijing and Shanghai show a growing willingness to look past previous bear markets as the nation’s central bank steps up efforts to support the economy and returns from alternative investments such as real estate decline.

Growing Buzz

The renewed public infatuation with shares has led to jam-packed brokerage outlets, record turnover on the country’s two biggest bourses and what locals describe as a growing buzz about the market in conversations with everyone from family to friends and taxi drivers. It comes just as China gives foreign money managers unprecedented access to equities through last month’s start of the Shanghai-Hong Kong exchange link.

While the rally’s speed has spurred China’s securities regulator and state-run media to warn investors of the risks of a reversal, Templeton Asset Management’s Mark Mobius and Morgan Stanley’s Jonathan Garner predict an extended bull market. Valuations at a three-year high of 12.5 times estimated earnings are still 70 percent below levels reached at the market’s peak in 2007, according to data compiled by Bloomberg.

“Everyone wants to see stocks rise,” said Xu Qian, a 37-year-old Shanghai-based airline pilot who is boosting equity holdings after losing money on China Southern Airlines Co. shares two years ago. “The market will climb to a new high.”

Xi pledged last year as he came into power to give markets a “decisive” role in the $9 trillion economy as part of the most sweeping set of reforms since the 1990s. China has cut fees by more than half for individuals and institutions opening share accounts this year as policy makers seek a buoyant equity market amid slumping property prices and an economic slowdown.

Accounts Jump

So far, Xi’s message has worked. China’s retail investors opened almost 900,000 accounts to trade stocks last week, the most since October 2007. That’s helped drive the Shanghai Composite Index up 22 percent in the past month through yesterday, compared with a 3.9 percent drop by the MSCI All-Country World Index. The value of equities changing hands on mainland exchanges surged to 1.24 trillion yuan on Dec. 9, almost five times the one-year average.

The Shanghai Composite climbed 1.3 percent to 3,061.02 at the close today, its highest level since November 2010.

Investors are also embracing leverage. The outstanding value of equity purchases using borrowed money climbed to a record 949.3 billion yuan as of Dec. 15, according to data from the Shanghai and Shenzhen bourses. That’s nearly triple a year ago and 25 times the level at the end of 2011, as regulators increased the number of stocks eligible for margin trading.

Bullish Forecasts

“My friends talk about stocks all the time,” said Chen Jing, a 26-year-old working in the Shanghai office of a multinational finance company. “That’s why I got into the market.”

Chen said she opened a trading account with her boyfriend last month and has been buying brokerages and banks, emboldened by bullish forecasts from strategists and a state think tank.

The Shanghai Composite may rise to 5,000 next year, Yin Zhongli, a vice director at the Chinese Academy of Social Sciences’s financial market research office, was cited as saying by the 21st Century Business Herald on Dec. 4. Shenyin & Wanguo Securities Co. predicts the index may reach 3,500 in 2015.

Pan Weiting, a 30-year-old accountant working for an international logistics company in Shanghai, is boosting equity purchases on bets the government will further loosen monetary conditions. The central bank unexpectedly cut borrowing costs last month to combat the weakest economic expansion since 1990.

Lower Rates

“Interest rates will keep going down next year and that’s good for asset prices,” Pan said by phone on Dec. 11. “I am sure the rally will continue” because the market isn’t as overheated as during the 2007 bubble.

The Shanghai Composite surged more than sixfold from 2005 to its peak of 6,092.06 in October 2007 as investors opened more than a million accounts a week. The rally sent valuations to 42 times projected earnings, while PetroChina Co. became the world’s first company with a $1 trillion value. The gauge plunged more than 70 percent within 13 months as the global financial crisis unfolded. PetroChina is now worth $272 billion.

State media are turning cautious on the current rally after earlier encouraging readers to buy shares. The People’s Daily said on its micro-blog Dec. 9 that some investors aren’t acting rationally, citing examples of people selling properties to buy stocks, while the Xinhua News Agency said the same day the market may be headed for a correction.

Keep Rising

Surging volatility is scaring off some individuals. On Dec. 9, the stock index rose as much as 2.4 percent and fell as far as 6.2 percent in the biggest swing since July 2009.

For Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group, such price swings are a buying opportunity. Mobius said on Dec. 11 he’s accumulating Chinese stocks “across the board.” Morgan Stanley’s Hong Kong-based strategist Garner is also in the optimist’s camp, saying on Dec. 2 there’s potential for share prices to double in 18 months.

As for Zhang, the real estate researcher, the bust of 2008 is in the past and the nation’s outlook is clear. “China’s stock market will keep rising in the next three years, despite fluctuations, he said. ‘‘I believe China will surpass the U.S. in the next few years under Xi’s leadership.”

— With assistance by Shidong Zhang, Allen Wan, and Tian Chen

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