Learn mandarin - Listening to the wisdom of investors

Opinion / Liang Hongfu

Listening to the wisdom of investors

By Hong Liang (China Daily)
Updated: 2007-07-17 07:08

When we cover an emerging stock market as diligent and knowledgeable
reporters, well-versed in the basics of economics, we tend to favor
rational explanations for the daily movements of share prices.

In doing so, we sometimes forget that the stock market does not
necessarily behave rationally. Investor sentiment plays an important role
in determining share prices. This is particularly true in a market like
the one on the Chinese mainland, where individual investors account for a
large share of the daily turnover.

Underlying economic fundamentals, such as the liquidity level, interest
rates, inflation and corporate performance, will no doubt combine to
determine the longer-term trend of the stock market. But day-to-day
fluctuations are often the result of flows of short-term investment
capital, which, in turn, depend heavily on the whims of the investing
public.

There are times when the index is jerked either up or down by specific
incidents. The most recent example was the increase in the stamp duty on
May 30, which sent the Shanghai stock market indicator down a whopping
6.5 percent in one day.

But on most days, it is not so easy to explain why the market performs
the way it does. This makes covering the mainland stock market a lot more
challenging than covering the relatively more mature markets of, say,
Hong Kong or Singapore. It is a lot more fun, too.

To cover the Chinese mainland stock market well, we must broaden our base
of sources to include not only the usual economists, stock analysts and
fund managers, but also financial planners, bank customer relations
managers and habitual traders - people who buy and sell stocks for
themselves. Of course, we need the economists and stock analysts to
provide a solid base for understanding the broad market trends. But no
serious observers of the mainland stock market can afford to ignore the
collective sentiment of the many individual investors.

We read numerous news reports attributing the fall in share prices to
investors' worries about liquidity being sucked up by the proposed
government bond issue. When the share index continued to fall the
following day, fresh explanations were presented. This time, investors
were supposedly concerned about possible further action by the government
to tighten liquidity.

Just as the market made a turnaround, we were told that investors'
confidence had been boosted by either a bullish economic forecast,
projected strong corporate performance or a renewed flood of liquidity
into the stock market. We are not sure if these were the true
explanations of investors' fast changing mood, or merely rationalizations
by reporters and their market sources. Stock brokers can tell us what
their clients are thinking. But the best way to find out is for the
reporter to actually talk to the investors - the pensioners, taxi drivers
and housewives.

The investors in Shanghai we have talked to seem to be more sanguine than
many professional operators in the face of the increased market
volatility. Few of them are thinking about withdrawing from the market.
They do get jittery from time to time for reasons that may seem
irrational to a trained economist or professional analyst. But most
investors we talked to were confident that the market would continue to
go up.

Some investors, especially those who entered the market at a late stage,
have lost money. But margin trading, or buying shares with borrowed
funds, is rare. For that reason, the occasional plunge in share prices in
recent weeks has not created strong sell pressure. That explains why the
stock market has typically recovered almost immediately after a sharp
fall.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 07/17/2007 page10)

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