By Hu Yuanyuan (China Daily)
Updated: 2007-08-07 08:41

It's a record: 13 million yuan (US$1.72 million) in 103 days. That won Wang Xiujie a sobriquet, too: "Big Brother Leader 777". But the nouveau riche's story didn't end like a fairy tale. He has been arrested for running an unlicensed securities consultancy business.

So what's the story behind the story? The answer lies in the charge of the bull in the stock market and the ever-increasing number of small investors. The Shanghai Composite Index has catapulted from 2715 on January 4 to above 4600 today. And during its peak, an average day saw more than 300,000 people opening A-share accounts.

These fresh investors were Wang's perfect targets to make a quick buck in extra quick time. On December 25 last year, Wang opened his first QQ (instant messaging) club to pass on tips to stock investors, but for a fee: 3,000 yuan a year.

In the next several months, Wang set up 12 more QQ clubs, each with 100 to 120 members from more than 20 provinces and cities. Such was the demand for tips that Wang more than doubled his fee, to 7,000 yuan.

A man surnamed Liu from Xiamen in East China's Fujian Province was among Wang's first batch of members. "In the beginning, I did make some money from the stocks that Wang suggested. But later, I lost a lot more because of his wrong tips," he says. Liu had suffered enough loss and couldn't take it any more. So he moved court against Wang, prompting police to arrest him earlier last month.

Investors discuss market movements at a bourse in Beijing. The Shanghai Composite Index has catapulted from 2715 on January 4 to above 4600.

Wang's case is just the tip the iceberg, for there are hundreds of "Big Brother Leader 777," in the country. One has to just log on to a stock-trading website such as http://guba.eastmoney.com to see some of the sensational advertisements promising 20 to 30 percent returns within a week.

Business reporter Liu Qian says she often gets text messages asking her to buy or sell a particular stock at a designated time. But she has never trusted them. "How can strangers send you money - that too without any reason?"

Though Wang's case has been an eye opener for some investors, there are those who still refuse to see the writing on the wall. Wu Hua, of Ningbo in East China's Zhejiang Province, still subscribes to a QQ club for insider information, even though he knows everything about Wang.

"Information from our club is more reliable," Wu says with confidence. He insists that "his" club is different from that of Wang's. "I've tried it several times, and it really works. And the charge is reasonable."

Wu entered the stock market only in January, and "joined" the QQ club in March on a friend's advice. He pays 300 yuan a month for the tips. And he doesn't think "his" club is illegal. "It just makes money in exchange for the information it supplies," he says.

What Wu and his likes don't know is that that under Articles 122 and 197 of the Securities Law, any institution or person conducting securities business without a license is deemed illegal, says lawyer Lin Tezhi. "The implementation of this rule, however, is not so easy, given the covertness of such cases," the Jingtian Law firm professional says.

But the China Securities Regulatory Commission (CSRC) is determined to straighten things out. In the first half of the year, the securities watchdog received 1,638 complaints on various operations, says CSRC spokesman Liu Xinhua. It has investigated 524 of them and detected 11 cases of unlicensed securities consulting firms on the Internet. Six of those are suspected securities crimes and have been handed over to the Public Security Bureau.

The Internet is the major source of all such illegal operations, Liu Xinhua says. "The suspects are using websites, blogs and QQ to pass on 'tips' to investors and charging fees in the name of memberships, training, services and/or consultancy."

Apart from monitoring and striking at illegal securities operations, educating stock investors is also very important, Liu Xinhua says.

But experts don't see that as an easy job. The popularity of informal fund managers is fuelled to some extent by too many newcomers to the stock market, says a China-CITIC Securities analyst.

"Since the market has been bullish for a long time, many small investors think they can make easy money by just buying any stock. What they don't realize is that playing in stocks needs professional knowledge. Phoneys have a field day because licensed analysts cannot meet the demand of new investors," the analyst says.

The major sources of small investors' knowledge about stocks are financial books, TV programs, blogs and seminars. "It's really difficult to understand the complicated techniques and terms (of the stock market) in a short time," says Li Qiang, an expert with a company. "And suggestions on financial TV programs are usually very general. They can hardly give us practical guidance." 

The situation can change only if investors change their mindset, says the China-CITIC analyst.

An Everbright Bank report published recently shows the majority of domestic investors lack professional knowledge. If that's the case, they should either buy mutual funds or approach professional firms to manage their wealth, says Gao Huiqing, an expert with the State Information Center.

In fact, after the sudden, but temporary, slump in the stock market that began on May 30, an increasing number of investors started opting for mutual funds. "The value of my stocks shrunk by 40 percent in early June, whereas my fund assets dropped only 16 percent," says Wang Juan, a 29-year-old college teacher. She now plans to put most of her investments in open-ended funds.

The management fees that professional traders charge for funds is only about 2 percent. Hence, they are gaining popularity among small investors. For instance, subscriptions for a new fund launched by a joint venture of Bank of Communications and Schroder on August 1 crossed 30 billion yuan, more than twice its expected target of 12 billion yuan.

Small investors can also choose wealth management products, which usually involve lower risk compared even to mutual funds. Some products promise a minimum return, too.

But the decision has to come from the new investors eager to make some fast money.