China’s stock market goes boom by Scott Cendrowski @FortuneMagazine December 17, 2014, 10:10 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons There’s mania in China right now. Stock market mania. It’s a bull market—niu shi— and people are excited. “It’s still not crazy, not crazy,” said an investment banker working in Beijing, who didn’t want his name used because his bosses don’t like him talking about the crazy stock market. “These days market rises too fast,” he reflected, “but still many of my friends think the market is undervalued in many sectors.” The rally has been fast and furious. It started this summer when the state-run Xinhua news agency started trumpeting stocks, publishing eight reports over four days about low valuations. Other state media said a strong stock market should reflect a strong China. Right on cue, stocks took off in September and have never looked back. Boosted by an interest rate cut, the Shanghai market is up 25% in just the past month. It closed today at its highest level since November 2010 after gaining 50% since the summer. “I would argue everyone in China is a speculative trader,” says Fraser Howie, co-author of Red Capitalism who’s worked as a broker and trader in Asian markets for 15 years. “Fundamentals matter far less than other markets. You see this by the violence of the moves in China.” He points out that nothing drastic in the outlook for China has changed: the new administration’s reform packages are just now being implemented; GDP forecasts have barely budged; those bearish on the housing market haven’t changed their tune. While the long-term outlook hasn’t changed, the stock market is up 25% in a month as investors get excited by gains following gains. Margin accounts using borrowed money have multiplied, as have new stock accounts. Ge Tianyu is a graduate student who this month opened a margin account, allowing him to double his bet using the brokerage’s money. He waited a little while before opening it, he says, to make sure the bull market was in full swing. He uses technical parameters when he buys stocks, and never holds them longer than three days. By the end of last week, he says he had notched a 50% profit. “Speculative bull markets can make maximum profits,” says the 26-year-old. Four decades his senior, Wang Shuying trades stocks on her Meizu phone from home in Beijing. She puts about 60% of her money in stock funds; the rest she trades herself. She doesn’t focus on the bigger economy, she says, as it has little effect on the stocks she buys. She sticks to the industry she knows best: nuclear. Retired from the China National Nuclear Corporation, she bought 6,800 shares in SUFA Technology, Shenzhen-traded company that makes valves for nuclear plants. In September she paid 16.80 RMB a share; today it trades at 31 RMB. She doesn’t think the bull market will last, but then again, she doesn’t much care: she’ll sell some of her stock by the end of the year hoping to earn a tidy 100% profit. Wang Bin works for the state-owned energy giant China National Petroleum Corp., CNPC. He’s busy with his job, but when stocks go crazy, like they have recently, he starts tuning in. Wang, 36, pays closest attention to companies aligned with China’s industrial policies, such as nuclear power and artificial intelligence. Normally he holds stocks for half a year, but it’s not always easy. A couple months ago he bought shares of Shenzhen Aotexun, an electric power equipment firm, which have since tumbled by 10%. With the rest of the stock market rising, he’s a little miffed, but not deterred. “I think this is a field that has industrial policy support— it is no problem,” he says. When Western readers hear that retail investors account for 60-80% of the trading in China, they might think of the mom and pop investors portrayed at home—the grandmas investing their pensions, the local manager investing for his kid’s college fund. While a sliver of that exists in China, the author Howie has written repeatedly that the Chinese press omits the fact that stocks are a rich person’s game in the country. Seventy five percent of the individual stock accounts in China have less than 100,000 yuan ($16,000). The accounts with upwards of $1 million or more have a far greater push on the market. “When you start looking at value of those bigger accounts, the small investors’ effect is not as impressive as first appears,” he says. In the last bull market of 2007, when the Chinese market more than doubled in just seven months, one of Howie’s colleagues at the brokerage CLSA spent a week asking everyone he could find how they were investing. The number of those actually trading was minimal, but everyone had a story about a friend striking it rich. One of the places you can find some skepticism about stocks’ recent rise, ironically enough, is the very state-run press that earlier stoked enthusiasm. Last week Xinhua cited anonymous researchers predicting a pullback. A copy editor at the English-language China Daily, Huang Xiangyang, wrote a column wondering why China’s bull markets always seem to fizzle out soon after they start. “Based on global experience, returns on stocks are still closely correlated with corporate growth and innovation,” he wrote. “That may explain why bull markets in China never last more than two years, compared with as many as 17 years on Wall Street.” Even so, he called this gold rush too good to miss. “In this market you do not have to buy and hold, as value investors are supposed to do. All you have to do is take the pulse of government policies and speculate on them.” Easy enough, for those able to get into the game.