By HONG LIANG (China Daily)
Updated: 2007-09-18 07:26

It is understandable for investors in China to believe that a healthy stock market is one that keeps going up. Without any form of derivative products for hedging in a downturn, money can only be made in a bull market.

Based on that yardstick, the Chinese stock market, which has surged a total of 100 percent, despite occasionally faltering, since the beginning of the year, must seem to be in robust health even to the most adroit investors. But behind that facade lurks a myriad of discrepancies and irregularities that can, if not addressed in time, wreak havoc on the capital market.

The symptoms of excess are becoming increasingly apparent as the market continues to scale new heights. Listen to Shang Fulin, chairman of the China Securities Regulatory Commission, or CSRC.

At a recent investor conference in Beijing, Shang listed various stock market "abnormalities" to illustrate the "accumulated" risk that has been ignored by so many investors. What seemed to irk Shang most was the "immoral" practice of some particularly aggressive stock brokers in encouraging students to punt on the stock market with allowances from their parents. "What capability do these students have in taking risks?" he asked, rhetorically.

Such "capability" appears to have eluded many adult investors, who obviously believe that the market is going only one way, up. How would it otherwise be possible to justify the average of about 200 percent premium on the issue price of the 77 IPO shares this year on the first day of trading? The premiums on many IPO shares after their market debut were too high, according to Shang.

In the madding rush for scripts, many investors have become so gullible that even corporate wall flowers with decidedly mediocre performances could be transformed into stock market darlings overnight with the magic wand of so-called "restructuring", which, in many cases, merely involves the injection of some dubious assets that have little intrinsic value. Under the banner of corporate restructuring, the share prices of some low-quality stocks have risen to unrealistic levels, Shang said.

To be sure, the bull market is underscored by a robust economy, plentiful supply of liquidity and sterling performance of the major corporations. But speculative fever is widely seen to be playing an increasingly dominant role in driving the stock market frenzy, continuously fed by disinformation spread by the unwary financial media among the susceptible investment public.

It has been said, even by some of the most respected research establishments, that the number of newly opened stock investment accounts is a reliable indication of the stock market trend. But the credibility of that number is suspect as more and more sham accounts are manufactured by agents of stock broking firms to meet their ever demanding business quotas.

In many ways, China's securities rules and regulations are no less stringent than those in many relatively more matured capital markets. But investigations into market malpractices, such as insider trading and share price rigging, have proved to be problematic. Willing destruction of evidence by companies under investigation is a "serious" issue, according to Shang.

Under these circumstances, it is imperative to educate the investment public to raise their awareness of the market risks. In Shang's view, investor education is a long-term, systematic task that must be undertaken with persistence and perseverance.

The purpose of investors' education is to help investors to make informed decisions. There is never the intention to use investors' education to "depress" the stock market, Shang said.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 09/18/2007 page10)