Unfazed, small investors stay in China's market

She earned little sympathy from Wang, who scoffed that it "would be ridiculous to put all my money into the stock market." And most of her neighbors at the trading screens betrayed little emotion about the losses they had suffered earlier in the week.

"People were definitely nervous" on the trading floor last Tuesday, says Buan Zhihuan, a retired marketing executive, but the 8.8 percent one-day price drop caused "no panic. People were ready for a general readjustment after the increases we saw last year."

"If you have gone up nearly 150 percent in little over a year, losing 9 percent of the frosting does not really spoil the cake," says William Overholt, director of the RAND Corp.'s Center for Asia-Pacific Policy, and a former investment banker in Hong Kong.

Analysts are still scratching their heads over exactly why Chinese share prices dropped so precipitously; it appears that private funds investing for groups of individuals decided to take profits when the market closed Monday night at a record 3,000 points – a psychological barrier – and hordes of retail investors followed suit.

The drop does not appear to have dented local confidence. Even as prices were experiencing their greatest one day drop in a decade Tuesday, 188,876 trading accounts were opened – two and a half times the daily average in February.

On the Yin Tai floor, former fighter pilot Chen Xitai is not fazed. "We are in a boom market, and the characteristics of such a market are gradual increases and sudden drops," he says firmly. "I have confidence in the Chinese markets."

Mr. Chen's wife, Wan Hui, seemed a bit proud that for a day at least, Shanghai's bourse had behaved like a global price-setter. "Outside China, people pay attention to us now," she says. "I hope China gets stronger and stronger in the future so foreign countries will not look down on us."

That foreign stock exchanges should have followed Shanghai's lead, however, in tumbling one after the other, was "absurd," says Mr. Overholt.

If batty grannies acting on wild rumors led Wall Street's highest-paid analysts by the nose, says Tang Xiaosheng, strategic analyst with Guoxin Securities, a Chinese brokerage, it was because "foreign investors do not understand the Chinese market and economy the way the Chinese do."

The stock market bears little relationship to the real economy, Mr. Tang points out. From 2001 to 2005, the economy grew by nearly 9 percent a year; stock prices fell 50 percent over the same period.

Prices are high now, says Overholt, largely because Chinese investors have nowhere to put the $4 trillion in savings they have accumulated except in bank accounts yielding 1.6 percent interest after tax or the stock market.

Faced with that choice, "a lot of money goes into speculation that drives [share] prices to completely unreasonable values, so the market is vulnerable to periods of sudden deflation," he says.

It is also subject to manipulation, says Mr. Buang, who noted that shares in state-owned banks led the price rally on Wednesday, suggesting that the government had stepped in.

"Here it's not like America or Europe where there are rules and markets follow them," Buang says. "Here it is all rumors spread on purpose."

The Shanghai exchange's loss of 3 percent Thursday did not seem to bother many of the investors at Yin Tai. Even Mrs. Zhou was smiling, in a dazed sort of way. "What else can I do?" she wondered.

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