A new piece by the Economist on China’s stock market gets it.

Tens of millions of Chinese are risking their shirts in a stockmarket frenzy. If it goes wrong, things could get nasty

WOULD-BE share punters, keen for a piece of China’s booming stockmarket, are queuing to open accounts at a Beijing branch of China Merchants Securities. A busy manager, handing out application forms, says he is taking on 100 new clients a day, perhaps five times as many as a year ago. Bunches of small investors, ranging from students to pensioners, crowd around computer terminals to carry out their trades, keeping an eye on the prices as they flicker across big electronic screens. China’s biggest-ever stockmarket boom may be turning into a bubble—and the country’s leaders are getting worried.

If the bubble were to pop, it could have a bigger impact on social stability than any previous downturn in the stockmarket’s 16-year history. There are now more than 91m accounts held by individuals at brokers or in mutual funds. Estimates for the number of investors vary widely. At the height of the last market boom, in 2001, there were 60m accounts but perhaps fewer than 10m investors. There are certainly many millions more now. New accounts at brokers are being opened at a rate of more than 200,000 a day, touching a high of more than 310,000 on April 24th. The total so far this year is more than 8m, which is around ten times as many as in the whole of 2005, when the market began to emerge from a four-year slump.

“It’s like a casino set up by the Communist Party,” says one. Another says only fools are still investing. But none has any plans to cash out.

Again, this Party-run casino analogy leads to the question: when does the house win in this casino? When the markets is going up, everyone wins and if the market crashes everyone – including the Party – loses. People aren’t stupid. They know the government will ‘not allow a crash,’ and thus worry less about a bubble than economic fundamentals tell them that they should. The higher the market flies, (1) the more that it will cost for the Party to keep things inflated or to keep the landing soft, or (2) the harder the crash. The best reason that I can come up with for the delay in controls or other changes that might trigger the bursting of the bubble is the upcoming Party Congress in the fall.

Related pieces:
Caijing’s Hu Shuli – Watch Out when the Market Soars
Chinese Growth Shows Little Restraint, Rising 11.1% in Quarter – NYT — Leading to a 5% correction in the stock market.

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