Wu Guangqiang

    jw368@163.com

    CHINESE stock investors have just experienced another, yet the most violent ever, turbulence during the past couple of weeks, which once again demonstrated “the highly volatile, speculative, and risky nature of the emerging market,” as I described in my article entitled “Behind the stock boom” on Dec. 22, 2014, for Shenzhen Daily. In the opinion piece, while I expressed my cautious optimism about the bull market needed to help advance China’s economic transformation, I specifically warned small investors against the ignorance of risks, which could lead to a disaster.

    But I didn’t anticipate for a tribulation to come so soon and with such horrifying destructive power. In this market crash, the speed at which share prices fell and the way investors scrambled to sell off their shares regardless of heavy losses were unprecedented.

    Doubtlessly, no previous stock slump has hurt investors as badly as this one because anyone who failed to escape the fall suffered heavy losses in the steepest ever price nosedive. The main Shanghai index dived from its latest peak of 5,178 on June 12 all the way down to 3,373 Thursday, a 35-percent drop over a mere 17 trading days.

    Most stocks saw their prices halved during the drastic tumble and some even lost over 60 percent of their value. What made stockholders desperate was that their shares were firmly sealed at the daily down limit of 10 percent every day during the irrational sell-off — the market actually lost liquidity.

    Investors sold their shares, not because they wanted to cash in their profits, but because the sudden stock bust had so frightened the investors that they decided that the earlier they sold off their shares, the less loss they would suffer. As a result, the massive sell-off led to a “bloody stampede,” creating a vicious cycle.

    More than 20 trillion yuan (US$3 trillion) in market value — more than the entire economic output of Brazil — was wiped out in the rout.

    Obviously, this was not a normal correction or adjustment, but a crisis that, if out of control, could spill over to other areas of the economy.

    The Central Government made unprecedented efforts to stop the worst turbulence in China’s 24-year-old stock market. During the past two weeks, the government, regulators and financial institutions have waged a concerted campaign to restore market confidence.

    An unusual move was the Ministry of Public Security’s announcement to carry out a swift investigation into evidence related to “malicious short selling” and deal with them according to law.

    The efforts paid off! Chinese shares staged a strong two-day rebound. Shanghai and Shenzhen’s major indexes leaped sharply.

    What I’m concerned about now is not whether China’s bull market will continue, but what lessons both securities watchdogs and investors should learn from the turbulence.

    We must not forget the backdrop of the plunge: By June 12, the Shanghai Index had risen 59 percent from the beginning of this year. The prices of many shares had gone up by several times, some even dozens of times. But most investors were so intoxicated with their eye-popping gains and hopes of earning more that they forgot all about the risks.

    The prime culprit was excessive speculation. A widely believed accomplice was margin trading, namely borrowing money from a broker or lender to finance additional stock purchases one could not otherwise afford. Lenders usually provide loans several times the amount of investors’ own money in dealings mostly out of the regulator’s radar screen.

    China’s current situation reminded me of the 1920s, when the U.S. stock market was booming, but much of the run-up was fueled by margin trading, which was out of control and banned in February 1929, eight months before the notorious crash that would spiral the country into a devastating depression.

    Who brought this garbage into China and why?

    While researching this article, two stories I read broke my heart and caused me great worry. A husband in Nanchang, Jiangxi Province, in a fit of rage, killed his wife, who had lost 1.8 million yuan in the recent stock tumble and her money had been borrowed.

    On Friday, crazy investors rushed to buy shares of a company at the top limit price without knowing that the company would be delisted the following day!

    (The author is an English tutor and freelance writer.)