Blind faith in China's stock market

In late June, as the Chinese stock market was in a tailspin, a joke began making the rounds. "We played the market when we thought stocks had hit rock bottom," one investor says to another, "only to find there was a basement below. We played the market when prices were in the basement, only to find there was a cellar underneath that, and when we kept playing in the cellar, we found that below that there was hell. Then we took our lives in our hands and kept playing when stocks were in hell - only to discover it's true what they say: There are 18 levels of hell!"

For the officials of China's Securities Regulatory Commission, July 4 must have seemed like hell on earth: They were as frantic as ants on a hot wok. That morning, the heads of 21 top brokerages met with the regulatory commission, and, according to media reports, agreed to supply some 120 billion renminbi, or $19.4 billion, to a market rescue fund.

The plan was in clear violation of the Securities Law. Brokers need approval from their shareholders to give up so much money. But with the regulatory agency desperate for a cash infusion, the brokers were in no mood to follow the law. We Chinese are used to this kind of thing: In China, law and the rule of law are a world apart.

Many people think the stock market plunge, which continued this week, had its origin in the government clampdown on margin trading, the use of borrowed money to buy stocks, which had led to a feverish expansion of broker financing and to the stock market bubble. Brokers are required to back trades with the equivalent amount of cash from a client, but competition and a thriving stock market had led too many to flout the rules. Every day investors complained to brokers that the financial threshold for trading was too high. The brokerages felt they had no choice but to ease the cash requirements for making trades.

As the market boomed, more and more ordinary people invested their savings and funneled borrowed money into stocks. The virtual economy of the markets detached itself from economic fundamentals, and stock prices of listed companies became disconnected from their real value. It was as though investors were spending 100 yuan to buy a 1 yuan pair of chopsticks.

When you realize that there are some 100 million investors in China's stock market, and when you think, too, of the throngs of gambling-loving Chinese packing the world's casinos, along with the clatter of mahjong tiles inside practically every Chinese home (they say that when you're on a plane and hear people shuffling mahjong tiles below, you know you're over China), then it is clear that for many Chinese the stock market simply whets a thirst for a quick profit. The government was keen to see people move money from savings - some Chinese put away as much as half of their income - into capital markets and thus stimulate an increasingly sluggish economy.