The Journal Beats the Financial Times for a Change, on the Frothy Chinese Stock Market

We have been hard on the Journal for its tendency to politicize news coverage and omit stories that point to systemic financial risk. So we would like to give credit to the Journal when credit is due.

This morning, the Wall Street Journal had a first page story on the stock market mania in China, while the Financial Times’ comparable story on a semi-official but nevertheless direct warning on the Chinese stock market bubble, will run in the following day’s print issue.

Both articles are worth reading in full. From the WSJ’s “Stock Frenzy in China Stokes Official Concern:”

As China’s stock market continues its record-breaking rally, regulators are increasingly expressing concern that the country’s growing ranks of investors are doing everything from mortgaging their homes to borrowing against their credit cards to get in on the action.

China’s stock-market benchmark, the Shanghai Composite Index, rose 130% in 2006 and has continued to soar this year, placing Chinese stocks among the world’s top performers. Yesterday, the index gained 2.2% to 2945.26.

In a frenzy that recalls the late-1990s dot-com boom in the U.S., the rally has drawn in a new generation of investors. Online trading is spreading rapidly, and in recent weeks individuals have been opening stock-trading accounts at the rate of about 90,000 per day, 35 times the pace of a year earlier….

Regulators say they are increasingly seeing signs that investors, caught up in the stock mania, are pledging their homes as collateral for personal loans, or teaming up with merchants to, in effect, borrow from their credit cards, presumably hoping that stocks will rise enough before the bill comes due to pay off the debt….

Data on practices like these are scarce. But they are becoming common enough that the government is starting to take notice. In a recent directive to credit-card issuers, the China Banking Regulatory Commission warned banks to be on the lookout for suspicious credit-card transactions….

Yesterday, in another indication of rising government concern, state-run China Central Television broadcast a midday program citing the risks of stock-market investing, in particular the “taboo” practice of funding stock purchases using homes as collateral. “Even in a bull market, 30% to 40% of people would suffer losses,” the program’s anchor said. The broadcast “was arranged according to a requirement of the Central Propaganda Department,” says a person with knowledge of the situation.

The Financial Times’ story is titled “Warning on China stock market ‘bubble’:”

The Chinese stock market is developing into a “bubble” and investors are in danger of behaving irrationally, a leading Chinese legislator said on Tuesday in the strongest public expression of concern to come from a senior state figure.

Cheng Siwei, vice-chairman of the National People’s Congress and an influential figure in Beijing financial circles, warned the mainland stock market could be overheating, after a rise of 130 per cent last year.

“There is a bubble going on. Investors should be concerned about the risks,” Mr Cheng said in an interview with the Financial Times.

“But in a bull market, people will invest relatively irrationally. Every investor thinks they can win. But many will end up losing. But that is their risk and their choice….You can’t take administrative measures to change people’s behaviour. The market is based on people’s behaviour. Investors will have to learn their own lessons.”….

Mr Cheng, speaking at the FT China-Middle East summit in Dubai, is not officially involved in financial policy but his public views often reflect the thinking of senior leaders.

His comments came as signs emerged the government was trying to limit speculation in stocks. A sharp fall could hamper plans for large companies to launch domestic flotations this year.

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