TO THE POINT: Along with the Chinese Government’s determination to crack down on insider trading, the mainland stock market has experienced more volatility recently with sharp ups and downs. Overall, however, the market is on a rising track. A sea change has seen large amounts of banks deposits diverted to the stock market and away from personal savings. The benchmark Shanghai Composite Index lingers around 4,000 points, and experts believe it will go through a readjustment period in order to shrug off speculative and damaging capital. Meanwhile, it has been confirmed that three major red chip companies will return to the mainland stock market this year, with China Mobile taking the lead. In April, the consumer price index (CPI) grew 3 percent from a year earlier, led by food prices. Its growth rate is still higher than the one-year deposit rate, pushing China into a negative interest rate period. Automobiles, though confronted with competition over prices, are also witnessing a sales surge in China. To ease the tensions created by excess liquidity, China further lifted restrictions on the investment scale of qualified domestic institutional investors (QDIIs), freeing more Chinese capital to be invested overseas.

A New Era

The People’s Bank of China, the central bank, reported that household deposits in April decreased sharply by 167.4 billion yuan, compared with an increase of 60.6 billion yuan at the same time last year. Meanwhile, household loans went up 123.6 billion yuan in April, a year-on-year increase of 63 billion yuan, according to the bank.

The dramatic change signals a new era for Chinese citizens. In the past, they would rather put their life savings into the bank in hopes of eventually gaining interest returns.

Experts identified two major reasons for the deposit decrease. First, China is in a negative interest rate period, with its CPI growth hovering around 3 percent. The one-year bank deposit is fixed at 2.79 percent and is subject to 20 percent interest tax. So it is not economical to keep money in the banks and people are beginning to think of switching to other possibilities.

Second, the bullish stock market and the low access requirement have attracted many to divert their savings into the stock market. With less than 100 yuan, anyone can open an account in a securities company and begin to trade. Since the beginning of this year, the yuan-denominated A-share market on the mainland has risen by more than 50 percent and no one wants to be left behind in this financial feast.

An interesting saying has been floating around China: “The smart rich pay interest to banks, while the poor wait for banks’ interest.”

This April’s deposit shrinkage may well indicate an increasing financial awareness in China-many being enlightened by the bull market run.

The central bank has warned of stock bubbles, and the securities watchdog China Securities Regulatory Commission (CSRC) has vowed to take concrete measures to rein in the white-hot stock market and crack down on illegal transactions.

On May 15, the CSRC confirmed that Tang Jian, a fund manager for JP Morgan Asset Management’s China joint venture, conducted insider trading and has been brought to justice.

Suffering a nosedive of 3.64 percent on the same day as the insider trading was confirmed, Shanghai Composite Index rebounded and climbed to 4048 on May 17, showing off investors’ confidence in the Chinese mainland stock market.

It has been said jokingly that a harmonious society begins with a harmonious stock market and a harmonious market needs balanced policies. Many experts expect stock mania to continue for some time and believe the government won’t be too hard on small investors, because stability is the key.

The QDIIs Have Landed

Stocks on the Hong Kong Exchanges and Clearing Ltd. closed at 20,979 on May 14, rising 2.5 percent after news that the mainland securities regulator had allowed QDIIs the ability to invest up to half of their quotas directly in foreign stocks on May 11, a Friday. Formerly, the $15 billion quota was restricted to investments in foreign fixed-income products.

As opposed to QFIIs (qualified foreign institutional investors), QDIIs are granted more freedom to invest in overseas financial markets.

Tao Dong, chief economist with Suisse Credit First Boston, expected that backed by the QDII news, the Hong Kong stock exchange would continue to rise for a short period of time. But he also warned that the huge variety of financial derivatives will probably entrap mainland investors new to the financial markets.