The upcoming Beijing 2008 Olympic Games is generally regarded as a watershed for the stock market. Many investors planned to sell their stocks before the big event. Statistics from the China Securities Depository and Clearing Corp. on January 22 showed that 60 percent of the registered A-share traders left their accounts empty and stopped trading.

Bubble or not?

Though many believe the property prices are too high and a stock market bubble exists, Xie Baisan, professor of finance with Fudan University, believes it is totally normal. "The development of the Chinese mainland stock market is at a special period, and we should not judge it by a special standard," he said. Xie also contended that in different economies, different financial commodities can have different prices. "We must be clear of that," said Xie. The surging stock market is closely related to the appreciating Chinese currency. When the value of the Japanese yen increased in the mid-1980s, the Japanese stock market soared to a record high with the Nikkei index up to 38,957.44 at the end of 1989, quadrupling its mid-1980s level. Chinese Taiwan also experienced the same.

Is the Chinese A-share market worth investing in? People's opinions differ. Any stock market is supported by the overall economic performance of the country. If the economy is bad, even if the index is as low as 1,000 points, there might still be bubbles. However, if the economy is developing fast and sound, it is still worth investing even if the index climbs to 10,000 points.

When promoting the idea that the stock market is still good in the long run, Xia Bin, Director of the Finance Research Institute of Development Research Center of the State Council, reminded investors that they should not hold unrealistic ideas about the government or the central bank. "The government will not stand aside and let the bubble burst," he said. "But the government will take macro-control measures to make sure the stock market develops in a stable manner. Anyway, it is unnecessary for the government to suppress the stock market."

Protective measures

Xia contended that the country must watch over its financial markets, as "China is a financially weak country." He suggested the government take all measures to prevent the inflow of any kind of illegal capital.

The most direct external factor influencing the fledgling domestic stock market is the QFII scheme, which allows those institutional investors to invest in China's mainland financial market.

But the motives of QFIIs, who enter China through a legal channel, is very suspicious. On the one hand, they repeatedly warn investors to sell off their stocks in hand, and say that China's stock bubbles are about to burst. On the other hand, they lobby their own governments hard to ask China to give them more quotas to invest in the country.

"The QFII quota has increased to $30 billion, and nobody wants to be left behind," said Professor Xie. Xie contended that people who believe the Chinese stock market is full of bubbles should just walk away and not do one thing and say another.

Chinese regulatory authorities certainly have learned from lessons of various fund manager or dealer manipulations. The China Securities Regulatory Commission (CSRC) has vowed to combat stock market manipulators and has investigated some for maliciously circulating rumors.

To prevent the economy from overheating and the development of property price bubbles, the Chinese Government has taken several measures, including lifting the interest rate six times and raising the reserve requirement ratio 11 times.

When the government announced those changes in 2007, it hardly had any effect on the stock market, which defied all the efforts and continued to soar.

However, Andy Xie believes those measures will eventually take effect this year, coupled with the gloomy international situation. "It usually takes one year or more for government measures to take effect and that year is 2008," said Xie.

As a matter of fact, those tightening measures have already started to perform their function. Banks have already felt the pressure of a lack of loan quotas. At the Central Economic Work Conference held last December, the government changed its prudent monetary policy to "tightened." Excessive bank loans will be under strict check of the supervisory department.

Foundations of the bull market

Professor Xie strongly believes that the market will continue to be bullish. He pointed out three factors: the completion of share-holding reforms, the yuan's appreciation and the ever-growing performance of listed companies.

The subprime mortgage crisis will hurt the value of American banks, but Xie said Chinese banks are at a very good development stage, and such influence on China is small.

"CSRC Chairman Shang Fulin has done a great job in rejuvenating China's stock market," said Xie. China started a stock conversion reform in May 2005, which allows state-owned companies to convert untradable state shares into ordinary ones. Though the stock market started operating in 1990, the majority of well-performing companies did not join. In 2007, a large number of mainland companies listed in Hong Kong started to issue shares on the mainland. Xie said the bull market provided the best timing for those red chips to trade in their homeland market. The effort made by the CSRC cannot be erased overnight.

Second, the appreciating Chinese currency will continue to exert influence on the stock market. Mainland companies have become increasingly expensive when yuan appreciates. It will still contribute to the stock market boom. Incomes are growing. According to statistics from the People's Bank of China, residents' bank deposits were 17.55 trillion yuan ($2.4 trillion) by the end of 2007, 10 times that of 10 years ago. The increasing amount and growing value of the currency will ultimately prop up asset prices, according to Professor Xie.

Most importantly, the performance of listed companies is improving year on year.