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Stock plunge: Capitalism 101 for investors

(Washington Post)
Updated: 2007-03-02 08:50

While most of the world's stock markets looked to institutional investors to pull them out of this week's slide, China's exchanges depended heavily on people like Wang Weiping.
Wednesday morning, one day after a worldwide equity plunge was at least partially triggered by a massive sell-off at Chinese stock exchanges, Wang's portfolio had lost more than 10 percent of its value. But as other investors around her in the Liaoning Securities trading room in this northeastern city were agonizing over whether to sell as their stocks continued to sink, the 56-year-old retired government statistics worker was knitting a red sweater for her grandson.

Wang said she had seen the state-sponsored advertisements warning of the dangers of expecting immediate returns from the stock market. And she believed the government's promise that it would guard the stability of the financial markets.

She decided to hold. She was rewarded by afternoon, when the stocks rebounded.

"It's very normal for a stock market to go up and down. Those are part of the rules," she said, repeating almost word for word what experts from think tanks associated with the government had been saying all day.

To boost investor confidence Wednesday, the Chinese government took a variety of damage-control measures that included squelching rumors of a new capital gains tax. Even Premier Wen Jiabao spoke out. The official Xinhua News Agency said he would issue a statement Thursday calling for "deepened reform of the financial sectors as to enhance a sustained, healthy and safe development of the industry."

By the end of trading Wednesday, the key Shanghai index had regained 3.94 percent of its value after falling almost 9 percent the day before. Markets in the rest of Asia, however, continued to fall Wednesday: Tokyo was down 2.85 percent, Seoul lost 2.56 percent, and Hong Kong lost 2.46 percent.

Minggao Shen, a Citigroup economist based in Beijing, wrote in a report by three Citigroup analysts that the Shanghai sell-off was prompted by "ill-founded jitters" and that there was no significant new information revealed to justify it.

In the short term, the Chinese stock markets "will stabilize a bit," Shen said. "Some people need some time to adjust. It hurt many people. But I don't think there will be a bigger correction than this one."

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