By Calum MacLeod (USA Today)
Updated: 2007-03-02 08:52

http://www.usatoday.com/money/markets/world/2007-02-28-china-investor-usat_x.htm?csp=34

BEIJING - One day after China's worst stock market plunge in a decade, Chinese investors were counting their losses and vowing to stay the course in what analysts predict will remain a bull market.

Playing the nation's stocks "is like being at a casino," says Wan Ronghui, 35, one of more than 300 private investors watching a giant wall of electronic screens at the CITICS China Securities business hall in central Beijing.

"Whether you win or lose, you still stay. We're all addicted to it," says Wan, a shop manager earning $260 per month. He claims to have broken even on $6,460 of stock purchases since 1995.

The nearly 9% fall on Tuesday, which sent Wall Street and other world markets reeling, followed a record high on Monday, when the first day of trading after the Chinese New Year holiday saw the Shanghai composite index break 3000 for the first time.

Tuesday's fall, widely blamed on investors cashing in shares amid rumors of government plans to slow the nation's booming economy, was a necessary correction, says Shang Xuanwei, an employee of China Merchants Securities who also watched the markets on the CITICS business floor.

"The bubble had swollen and had to burst, but it will be blown up again soon. It's healthy, as I can now buy other stocks more cheaply," says Shang, 27, who didn't sell his $5,180 portfolio, noting it has doubled in the past 18 months. On Wednesday, China's major index bounced back a bit, gaining 4%.

Market's young history

The Shanghai Stock Exchange, mainland China's leading market, reopened in 1990 after four decades of being reviled as the ultimate symbol of capitalism. There's little stigma about share-owning in today's China, but Shanghai still has a long road ahead before it rivals Western exchanges, says Arthur Kroeber, director of Dragonomics Research, an economic research firm specializing in China.

"It's a casino, a highly speculative and volatile stock market," says Kroeber, who estimates there are about 5 million active retail investors in China, with multiple account holders accounting for the 80 million investors claimed by state media.

At least 60% of tradable market capitalization remains "in the hands of state enterprises, government agencies and large-scale private investors," Kroeber says. "The market is being jiggered around by a relatively small number of very large players."

The Shanghai market has two classes of shares. The market's A shares are restricted to Chinese investors, while foreign investors can own its B shares. The two classes have produced widely different results. The A shares rose 131% last year vs. 110% for the B. At Monday's record close the B shares were up another 45% for 2007, vs. just 13% for the A shares. As of Wednesday's close the B shares were still up 37% for the year, far outpacing the less than 8% rise in the A.

At the lowest rung of the stock ladder, playing the market is a social occasion for small investors, who enjoy conversation and free hot water for tea in CITICS' business hall.

Upstairs in the VIP section, clients with more than 5 million yuan (about $647,000) worth of stocks are served tea in private rooms. In a gambling-mad society where gambling is officially banned, and investment opportunities remain limited by Western standards, the markets offer rich reward for the daring. But larger investors deny the role of chance.

"It's not gambling: I use long-term investment strategies," says 73-year-old Liu, who gave only his surname for fear other investors will ape his methods, meticulously inscribed in a battered notebook.

"I lost $90,500 yesterday, 10% of my portfolio, but I am not scared," says Liu, who boasts he has earned $388,200 in profits on $517,600 worth of stock buys since retiring from his rail technology firm in 2001.

"I didn't sell on Tuesday as I feel the market will rise," Liu says. "China used to be very isolated. Now it influences the whole world."

Surprising global reach

The global impact of China's stock market even caught experts by surprise. "We thought the so-called butterfly effect only happened the other way around, when changes in the U.S. market have a certain effect across the Pacific," says Sam Zhang, of hedge fund manager Lim Global Investment and Research in Beijing.

"The financial market in China is very immature, and anything can happen," says Zhang, who still believes it's a bull market. "More and more people are rushing into the market, but they don't understand the risks involved."