FAR EASTERN ECONOMIC REVIEW, JUNE 3, 1993

Raging Bulls

China’s stock market craze catches on in the provinces

BY PAUL MOONEY IN CHANGSHA

Thirty Chinese punters crowd tightly around two video monitors in the VIP room of Hunan Securities Co. Each of these dahu, or big investors, has plunked down Rmb 300,000 (US$52,600) to join the VIP club, and hopefully profit from China’s two volatile stock markets, in Shanghai and Shenzhen.

The club, however, is not as plush as it sounds: it is a small, smoke-filled upstairs room in what still calls itself the Song Gui Guest House, though these days it seems to house more fledgling businesses than travelers. And it is nowhere near either exchange, but in Changsha, the drab capital of Hunan province, about 875 kilometres southwest of Shanghai and 600 km northwest of Shenzhen. The VIPs are connected to both exchanges by telephones installed in the only available corner --the bathroom.

Downstairs, on a makeshift-trading floor that must once have been the lobby, private businessmen, Communist Party cadres, factory workers, students, even women holding babies, anxiously watch the big board. Some study the numerous tip sheets sold at the front door, others laboriously jot down price movements in little notebooks. At the counters, clerks contend with harried investors waving thick wads of renminbi notes.

China’s stock frenzy is spreading to the hinterland. At securities houses in Changsha and other cities, tens of thousands of investors are jumping into stocks every week, sending the two fledgling markets on a roller-coaster ride of speculation. Connected to the markets by computer, fax and telephone, the investors outside the two exchange cities now outnumber those inside, analysts say. Indeed, these inland investors are largely responsible for Shanghai’s surging trading volume: Rmb 1044.4 billion during the first quarter of 1993, more than twice the total for all of 1992. This year alone, the Shanghai Stock Exchange has gained 99 new members, 98 of them from outside the city.

The situation is reminiscent of the stock fever that hit Taiwan in the late 1980s, when thousands of workers deserted their jobs to become full-time investors. Faced with double-digit inflation and unattractive bank deposit rates, Chinese are looking for better returns on their enormous savings. These are estimated at US$250 billion in bank deposits and perhaps an equal amount under the proverbial mattress. In Hunan Province alone, bank deposits totaled Rmb 37 billion at the end of 1992, up from Rmb 15.5 billion three years earlier.

“They see someone else invest one yuan in the stock market and it becomes five or six,” says Luo Huixiong, Hunan’s general manager, “while their one yuan sits in the bank earning only a few fen interest.”

The number of stock players in the Changsha area itself is fast approaching 100,000, says Luo. Even peasants from mountain areas are dabbling in chaogu, or “stir-frying stocks,” referring to the quick turnover of shares in the market. As in other cities, chaogu has proved a boon for Changsha’s infant securities industry. Hunan Securities, which opened in 1988 with just four employees, now has 118, and posts daily turnover of Rmb 30 million. To accommodate the growing number of large investors, it plans to triple the size of its VIP room to 70 square metres.

Hunan was Changsha’s only securities company until late last year. Now it has seven competitors. While its clients stand in a damp, dark hall with limited seating, the newly opened trading floor of the Bank of Agriculture, just around the corner, is comparatively ornate. Air-conditioned and well lit, it boasts marble counters, smoked-glass mirrors and padded seats. To make way for the trading floor, the bank moved its tellers upstairs.

But Hunan Securities has no shortage of customers. Chen, a middle-school teacher who comes to Hunan’s VIP room every day between classes, says “frying stocks is just my second job.”

Many eager investors will take a leave of absence from their severely over-staffed companies, but are careful not to abandon entirely their “iron rice bowls,” the cradle-to-grave security provided by state jobs. The more confident quit their jobs altogether to speculate in stocks.

Lily Li quit her job six months ago as a secretary in a trading company in the Shenzhen special economic zone. A full-time punter, Li pulls in Rmb 3,000 “on a good day” at Hunan Securities, more than she used to make in a year. She hopes to use her earnings to go into business as a steel and grain trader.

For Hunan’s Luo, the market is still immature and local investors are like “children taking their first steps.” Those who lose, says Luo, find it hard to accept. “If they make money they are happy,” he says. “But if they lose, they come in and pound on your desk.”

The stock market fever, however, is beginning to take its toll on Chinese banks. Private savings in state banks dropped by Rmb 4.5 billion in March, the first decrease since 1988, when inflation soared and panicky depositors rushed to withdraw. Analysts say much of the withdrawn money ends up in the securities markets.

While a string of investment companies in downtown Changsha were packed on one recent afternoon, a nearby branch of the Postal Savings Bank was conspicuously empty, except for three idle staff members behind the teller’s window.

“The stock market is putting us under a lot of pressure,” laments Wang Guojun, a manager with the Postal Savings Bank. “People are withdrawing their money to speculate in stocks.”

But the bank is hitting back, offering extended hours, air-conditioning, free, tea, a customer sofa, and even a pair of reading glasses, attached to the teller’s window, to help in filling out forms.

While these improvements seem meagre to outsiders, they are remarkable in a country that until recently showed only contempt for consumers. Wang concedes, however, that the bank’s efforts will have little effect in a city where finding a way to beat inflation is the biggest game in town. “The main problem,” says Wang, “is that our interest rates are too low.”

Changsha’s stock market fever shows no sign of abating, but not everyone is optimistic. “Mao Zedong would certainly have been opposed to this,” says a middle-aged worker named Zhang. “The only reason we have a stock market is because of Deng Xiaoping. That’s why we are so worried about what will happen after Deng dies.”