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Sidewalk Touts Trade Tips On Shanghai's Booming Bull Market

Apr 8, 2015
Originally published on April 9, 2015 8:50 am

On weekend afternoons, large crowds descend on a pair of street corners across from People's Square in downtown Shanghai to trade stock tips. Shen Yuxi has set up a homemade desk with two laptops, a big flat screen and offers insights like this:

"When a Communist Party chairman takes office, I buy stock in companies from his hometown," Shen tells a crowd of about 20 people that spills out over the sidewalk.

Recently, Shen has been buying up companies in Shaanxi, the home province of Xi Jinping, who serves as general secretary of China's Communist Party.

"After all, the party chairman is the country's highest official," says Shen, who fires off pitches for company stocks like machine-gun bursts. "This is the simplest rule of investing. You'll always win."

A lot of people have been winning on Shanghai's stock exchange in recent months. The index has nearly doubled in the past year, even as China's once-turbo-charged growth continues to cool.

Tech stocks on China's Shanghai and Shenzhen exchanges now have price-to-earnings ratios well beyond levels seen in the U.S. before the dot-com crash 15 years ago.

Shen, who says he's confidant the market will continue to rise, sells a homemade DVD filled with theories he promises will allow investors to keep riding the wave. Shen says he learned how to pick stocks from studying Warren Buffett, whose face adorns Shen's business cards.

Across the street, beneath a maple tree, stands Li Jingfei. He's quietly pitching another theory, based on the I-Ching, a classic Chinese text, originally used to predict the future.

"The I-Ching is a summary of laws that dictate the formation of the universe," Li says. "Everything's development needs to conform to this set of laws."

That includes, Li says, Shanghai's stock market.

Li's investing ideas aren't the most imaginative on the block. There's yet another tout who insists he can pick winners based on the theories of Mao Zedong, who, incidentally, didn't like stock markets — let alone capitalism.

Gan Li, who teaches economics at Texas A&M University, says people's perceptions — and not fundamentals — are driving the Shanghai market, and several factors are pushing up valuations.

As Chinese housing prices ebb, investors are pouring cash into the stock market and relying more and more on borrowed money to do so.

Despite China's sagging GDP growth numbers, Gan says people generally support President Xi's policies and remain fairly optimistic about the economy.

However, there is another, potentially worrisome element.

"We find that new investors, compared with old investors, are much less educated," says Gan, who also conducts a financial survey of households across China. "New entrants for the last half year are middle-school-educated people."

The overall stock market in Shanghai is still well below record levels set before the global financial crisis. If stocks continue to make big gains, Gan says, a serious bubble could form, leaving ordinary investors, like the ones on the streets of Shanghai, vulnerable to sudden price drops.

"If they don't fully understand the stock market, they may not be able to handle the risk that their living standards ... will be severely affected," says Gan.

Retail investors buy and sell stocks using their own accounts and make up a whopping 80 percent of the trading on the Shanghai exchange, which is notorious for insider trading.

Andy Xie, a blunt-spoken, independent economist, worries stock manipulators could target mom-and-pop investors with pump-and-dump schemes.

Xie says manipulators open thousands of accounts to create a fake trading volume and try to reel in retail investors, who are watching from the sidelines.

"Eventually, one day, they can't help themselves anymore. They [retail investors] jump in," Xie says. "That's the time you take them to the cleaners."

Copyright 2015 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

The Shanghai stock market is on a roll. The index has nearly doubled in the past year, even as China's once-turbo-charged growth continues to cool. So what gives? NPR's Shanghai correspondent Frank Langfitt explains.

FRANK LANGFITT, BYLINE: On weekend afternoons, hundreds of people come to downtown Shanghai, just across the street from People's Square, to trade stock tips. And right now I was just talking to a guy named Shen Yuxi. He's got two laptops, and he's got a flat-screen TV. And he's showing people how to invest in the market.

SHEN YUXI: (Foreign language spoken).

LANGFITT: "When a Communist Party chairman takes office," he tells me, "I buy stock in companies from his hometown. Xi Jingping is from Shaanxi Province, so therefore I buy stocks in Shaanxi. After all, the party chairman is the country's highest official. This is the simplest rule of investing. You'll always win." Shen sells a homemade DVD filled with theories he says he learned studying Warren Buffett, whose face adorns his business cards. Shen fires off pitches for companies like machine-gun bursts. His crowds spill out over the sidewalk to listen.

(SOUNDBITE OF CROSSTALK)

LANGFITT: Across the street, beneath a maple tree, is Li Jingfei. He's quietly pitching another theory, based on "I-Ching," a classic Chinese text originally used to predict the future.

LI JINGFEI: (Through interpreter) Traditional Chinese culture has a history of more than 2,000 years. The "I-Ching" is a summary of laws that dictate the formation of the universe. Everything's development needs to conform to this set of laws.

LANGFITT: "Including," Li says, "Shanghai's stock market." Li's ideas for investing aren't the most imaginative. There's yet another guy who insists he can pick winners based on the theories of Mao, who, incidentally, didn't like stock markets - let alone capitalism.

GAN LI: China's stock market's typically not driven by fundamentals. It's driven by people's perception.

LANGFITT: Gan Li teaches economics at Texas A&M. He says several things are driving up stocks here. With housing prices in decline, people are pouring cash into the market. And despite sagging GDP growth numbers, people generally support President Xi Jinping's policies and are fairly optimistic about the economy. But there's another potentially worrisome factor.

LI: We find that new investors compared with old investors are much less educated. New entrants for the last half a year, they are middle school-educated people.

LANGFITT: The market is still well below record levels set before the global financial crisis. But Gan says if stocks continue to make big gains, a serious bubble could form, leaving ordinary investors, like the ones on the streets of Shanghai, vulnerable to sudden price drops.

LI: If they don't understand - fully understand - stock market, they may not be able to handle the risk that their living standard, lifestyle, will be severely affected.

LANGFITT: Retail investors buy and sell stocks using their own accounts. They make up a whopping 80 percent of volume on the Shanghai exchange, which is notorious for insider training.

ANDY XIE: I'm Andy Xie. I'm an independent economist. I comment on financial markets.

LANGFITT: Xie worries stock manipulators could target some of these mom-and-pop investors with pump-and-dump schemes.

XIE: You just keep ramping up the stock. You use like thousands of your own accounts, creating this fictitious trading volume. Then you have a lot of people watching. Eventually, one day they cannot help themselves anymore; they jump in. That's the time you're taking them to the cleaners.

LANGFITT: Back on the street corner downtown, stock-picker Shen says the Shanghai exchange has at least one saving grace. The government, which has enormous control over the market, can signal when prices rise too high, as they did in 2007.

YUXI: (Through interpreter) When the market is about to fall, they'll give you a hint. When the market hit 6,000, the government said even monks are opening accounts; you guys need to be careful. So everyone left the market.

LANGFITT: Well, not everyone... Even some officials didn't listen to the government - and paid for it. Frank Langfitt, NPR News, Shanghai. Transcript provided by NPR, Copyright NPR.