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Investors in stock markets warned to beware of hype
3/12/2006 9:31

Investors in China's stock markets are being warned to beware of the hype about rising stock indexes and "bullish" markets -- at the risk of losing their money.

In less than a year, the Shanghai Composite Index exceeded 2,000 points from the lowest point of 1,000 points. The index closed at 2,102.05 points Friday, hitting new five-year record.

"An investment can take much longer to become profitable than the rising index suggests," said a stockholder surnamed Zhang at a service branch of Shenyin and Wanguo, a securities company in Shanghai.

"You are almost sure to lose money, even in the last two months when the major indexes shot up, if your shares do not belong to the blue chips included in Hushen 300," said Zhang.

About one fifth of the total stocks listed on the Shanghai and Shenzhen markets are selected for the Hushen 300 Index, accounting for 60 percent of the market value in China's stock market.

The result is that just 20 percent of stocks, mainly from the banking, real estate, steel, power and coal sectors, pushed the major indexes up.

Sun Leimin, general manager of Shanghai Xunsheng Investment and Consulting Company, analyzed the so-called "two-to-eight" phenomenon from the end of August last year to Oct. 27 this year when the Industrial and Commercial Bank of China (ICBC) went public.

Sun found that 42 percent of stocks rose faster than the major indexes in the first quarter, but the figure dropped to 30 percent in November.

Six blue chip stocks, including the ICBC, the Bank of China and the China Merchants Bank, accounted for nearly 40 percent of the total value on the Chinese stock markets.

Meanwhile, more than half the stocks had fallen since May. More than two thirds were cheaper than five years ago when the major index was around 1,900 points.

Analysts believe the "two-to-eight" phenomenon is normal for the Chinese markets in which a few outstanding stocks are favored by investors.

"China will enter an age of blue-chip-dominated markets and small stocks will gradually be marginalized," said Xue Lan, Citigroup's China research head.

Analysts warn the bullish market belongs to blue chips and investors should purchase shares in monopoly companies or those with core technology and proven management.

Despite different views on whether Chinese stocks will keep rising, analysts agree the market is getting better regulated.

Chinese securities regulators have moved to revive the market with the non-tradable share reform and urging the return of improperly used money by listed companies gained from the stock market.

The measures along with the strengthening yuan boosted Chinese shares. The equity value of the stock markets more than doubled from 3.3 trillion yuan at the end of last year to a record seven trillion yuan (875 billion U.S. dollars) last week.

As more money is expected to flow from individual deposit accounts to the stock market, the figure, estimated to account for 34 percent of the year's gross domestic product, may keep growing.