Beijing tries to tap brakes on stock boom, calling for caution after rapid rise

BEIJING – China's leaders are trying to tap the brakes on a stock market boom that could run out of control and disrupt economic reform plans.

After months of cheerleading for rising prices, the Communist Party newspaper People's Daily sounded a cautionary note this week, warning that stock trading is "high-risk." It said the public should "invest rationally."

China's main stock index has more than doubled since November, making its market the world's best performer.

The boom has been driven by easy credit, government encouragement for newcomers to invest and hopes the world's second-largest economy would rebound from a deepening slump. That outlook has been clouded by weaker-than-expected economic growth and trade — yet markets kept rising.

Now, Beijing is trying to nudge investors toward being more realistic without sending prices tumbling.

"The danger of the bubble bursting is huge," said market analyst Zhang Yang of Guojin Securities. "The government wants to cool the market."

Brokerages were ordered in late April to rein in lending to investors to buy stocks. That reflected concern small investors were taking dangerous risks and a fall in prices could lead to political tensions or losses for the state-owned securities industry.

Beijing keeps its financial system sealed off from global capital flows and few foreigners are allowed to invest in them. But changes in Chinese markets can affect sentiment abroad. April's announcement about margin lending triggered selling on Western exchanges.

On Tuesday, the benchmark Shanghai Composite Index declined 4 percent in what financial newspapers said might be a response to official efforts to cool investor emotions. It lost another 1.6 percent on Wednesday but still was up 35 percent over the past three months.

Yang Jing, an engineer for a Shanghai commercial real estate company, said he put 50,000 yuan ($8,000) into the market in March and was profitable until Tuesday's decline. After that, he said he was down 5 percent.

"If it goes down further, I will sell when I have lost 10 percent," said Yang, 27. Still, he said, "when the economy gets better, I think the market will get better again."

A deeper decline could disrupt the Communist Party's marathon effort to make the state-dominated economy more productive by giving market forces and entrepreneurs a bigger role.

Until now, Beijing has used the stock market mostly to raise money for state companies such as PetroChina Ltd. or Bank of China Ltd. Reformers want to make it a tool to finance private business that creates jobs and wealth. But investors, burned by previous booms and busts, might be scared off by a new slump at a time when economic growth is slowing.

The latest boom began after government newspapers said last summer stocks were cheap. That encouraged investors to believe Beijing wanted to see prices rise — and might prop up markets if needed.

In April, regulators encouraged trading by raising the number of brokerage accounts each investor could hold from one to 20. That allows them to trade through multiple brokerages to get better deals on fees.

The number of new accounts opened the week ending April 24 jumped 28 percent over the previous week to 4.1 million, according to the state-run China Securities Depository and Clearing Co. People's Daily, the ruling party newspaper, said that was three times the rate during China's last market boom in 2007 and a new record.

Stocks powered upward even as first quarter economic growth fell to 7 percent, the lowest since early 2009 in the aftermath of the global crisis. Trade contracted 6.3 percent from a year earlier.

Shares in a small Beijing company, Baofeng Technology Ltd., a maker of makes video headsets, soared so fast its managers felt obligated to issue a statement this week denying any illegal behavior was involved. Baofeng went public in March and in the two months since then its shares have risen more than 600 percent.

"We ask investors to fully understand the risks of stock investing," said the company statement. It appealed for "prudent decision-making and rational investment."

People's Daily called the latest market boom a "profitable 'golden era'" in its commentary Monday but warned about risks. It said most investors failed to make money in previous booms.

"Stocks are a high-risk investment product. This basic feature never changes," said People's Daily. It called for "calm consideration" and "fear of the market."

But some investors seem confident the government will ride to the rescue if markets plunge.

Zhou Rui, a 28-year-old researcher for a state-owned company in Shanghai, said his trading account has swelled from 30,000 yuan ($4,800) in 2013 to several hundred thousand yuan (tens of thousands of dollars). Zhou said that while economic data have worsened, that means the government is more likely to stimulate the economy.

"I can see the government is trying to help the market," he said.

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AP researchers Yu Bing and Dong Tongjian in Beijing and Fu Ting in Shanghai contributed.