Required Reading for Investors in China

Early this year, for instance, when a group of 17 Chinese companies was cited by regulators for misappropriating corporate funds, their stock prices all skyrocketed. When the Tianjin Global Magnetic Card Company failed to report quarterly earnings last April, its stock doubled. —“From Shanghai, Tremors Heard Around the World,” The New York Times. This week’s, er, fluctuations in the craps table otherwise known as the Shanghai Composite Index may or may not be the pause that refreshes, as most participants appear to believe.

However things go in the short run over there, this week’s New York Times carried another remarkable article about the Shanghai Bubble containing so much of the stuff of Investors Behaving Badly that I thought it imperative to urge readers to find the original story on the Times web site and read the entire story from beginning to end.

As the above excerpt demonstrates, it appears that eager buyers are so anxious to find stocks to buy that they care not one whit whether the company whose name they have heard is involved in something bad: the mere fact that they have found the name of a stock mentioned in the press is enough to generate a green buy ticket for their broker.

“If I hear a stock mentioned on the TV news I will pay attention to it,” says Xu Xiaochen, a 55-year-old retiree. Now, let’s cut these investors some slack. They’re not buying just any old name: the name itself ought to be “lucky.” I am not making this up.

In any case, many investors here seem to believe that the secret to picking stocks is luck and confidence in the government, not the fundamentals of any particular company.

“I don’t know how to choose a stock,” says a 61-year-old retiree who gave her name as Miss Hou at a local brokerage house a few weeks ago. “But I trust those technology companies. Maybe the names of some companies sound lucky to me, so I choose to buy these stocks.”

There is more—much more, including the previously skeptical Peking University finance professor who is now raising a fund to invest in the very stock market he had avoided:

“There’s a huge amount of money in the banking system with nowhere to go,” he said. “I think you’re going to see that money getting out of the banking system.” For most of those poor speculators, I suspect, the money will get out sooner than anybody thinks.

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.