Caution: Risky Stocks

The fast-growing mainland stock market now faces mounting risks after the benchmark Shanghai Composite Index soared to 6,092 points on October 16.

Although the index continued to hit record highs, the prices of nearly half of the stocks have not surpassed that of the period before May 30, when the Ministry of Finance raised the stock stamp tax from 0.1 percent to 0.3 percent.

The blue chips, like China Unicom, Industrial & Commercial Bank of China, Ping An of China, were the major impetus pushing the stock index to record high from late September. Out of this, a new phrase was created by securities analysts: The Blue Chip Bubble.

The securities watchdog China Securities Regulatory Commission (CSRC) repeatedly warned investors of market risks, while the three major securities newspapers-China Securities Journal, Shanghai Securities News and Securities Times-published commentaries warning of possible government intervention.

"I want to express my concern over the lack of risk awareness among investors," said Shang Fulin, Chairman of CSRC. Shang said risks have been gathering in the stock market and investors must be cautious.

However, individual investors were mostly optimistic. According to a survey conducted by the financial service provider ING, 70 percent of Chinese mainland respondents expect the stock market to continue to rise in the next three months.

Central Bank Governor Zhou Xiaochuan admitted that risks are growing in the financial market, but refused to elaborate on how serious the risk is as he "didn't want to use his own judgment to affect the decisions of investors." Zhou said that overall economic development remains stable.

Eight Is Enough?

For the eighth time of this year, the Chinese Central Bank ordered commercial banks to freeze more money to curb cash in circulation and reduce chances of speculation.

The reserve requirement ratio was raised to 13 percent by another 0.5 percentage points, its highest point in history, effective from October 25. The latest move marked the most frequent ratio adjustment in China's history. The announcement was greeted by strong stock market growth of 2.15 percent on the second day after the news was released.

The move is aimed at "strengthening liquidity management in the banking system and checking excessive credit growth," the Central Bank stated. Excess liquidity could lead to price hikes and add more fuel into the fire of the white-hot domestic stock and real estate markets.

The pressure from excessive liquidity is still heavy in spite of the frequent tightening measures, said Yin Jianfeng, financial researcher with the Chinese Academy of Social Sciences (CASS). Yin said the root cause of excessive liquidity is the mounting trade surplus under the current account of international payments, causing the Central Bank to provide more renminbi to exchange for all the foreign currency brought in by Chinese companies. "It increases the money that a bank can lend," Yin said. The September trade surplus remained high at $23.94 billion, up 56 percent year on year.

"As for the Central Bank, the major way to curb liquidity is to use the banks' influence," said Yin. But Yin pointed out that their influence on the national economy is going down and the central bank had no choice but to introduce stricter orders to banks.

Currently, more companies are seeking direct financing through raising money in the stock and the bond markets. In June 2000, bank loans accounted for 24 percent of company loans, but the figure fell to 18 percent at the same time this year. Yin suggested that the government must come up with better ways to curb impulsive investment and liquidity.

Swollen Reserves

Given the country's efforts to curb trade surplus and international