SHANGHAI, China — Share prices on the Shanghai Stock Exchange have risen almost 200 percent since the start of last year, yet there's less hustle and bustle in the exchange's lobby than there is across the street at the futuristic glass-enclosed Starbucks.
The lobby's stillness belies the fact that this is the world's hottest stock exchange, one with a capitalization exceeding $2 trillion but also one that bears little resemblance to exchanges in the developed world.
Shanghai's financial bustle is about a mile away, in a drab concrete brokerage building occupied by the China Merchants Securities Co. Ltd. There, on the third floor, about 100 mostly elderly day traders read or knit. When new financial data flash on a giant computer screen, they rush to desktop terminals to carry out electronic trades. The room resembles a casino where gray-haired retirees tempt Lady Luck on slot machines.
China's Shanghai exchange got the world's attention Feb. 27 when it fell 9 percent and world stocks briefly followed. The Dow fell more than 400 points, but soon recovered.
The recent tumbles on the Shanghai exchange anger Chinese investors, who've come to expect only upward momentum. They shrug off government attempts to cool the sizzling stock market with interest rate hikes and taxes on speculative stock sales.
What's clear to economists here and abroad is that China's booming stock exchanges operate like casinos, both in Shanghai and in the southern city of Shenzhen, where smaller companies and tech firms are listed.
Shares traded here aren't valued as they are on U.S., London or Tokyo exchanges. There's only limited company information available; financial disclosure is little more than a rumor. The bond market is in its infancy, so few companies issue bonds to finance expansion, relying instead on stocks to raise capital.
In this heated environment, investors balance their portfolios not to mitigate risk and loss, as U.S. investors might, but to maximize gains.
"Deep in the heart, investors know it is a casino. It is a place where you can become a millionaire overnight," said Fan Li, 31, a former journalist turned business consultant in Shanghai. Li doesn't play the inflated Shanghai stock market, preferring the relative safety of real estate.
There now are more than 100 million share-trading accounts in China, although the Chinese government thinks that many of them mask investors who've opened second and third accounts by borrowing the names of family members and friends. The number of Chinese who are playing the stock market could be between 35 million and 50 million, a large number but only a small fraction of China's population, which exceeds 1.3 billion.
Few investors hold stocks for the long haul. Share prices on the Shanghai exchange rose 130 percent last year and are up by nearly 60 percent this year. As prices gallop, investors sell, take profits, then begin the cycle again.
"Every five days everything is turned over in the market," said Li Jinliang, an associate finance professor at Tsinghua University, China's top business school.
There are several reasons for the stock surge. One is pent-up investment demand by Chinese citizens, who are fastidious savers because the government doesn't offer much of a safety net for health or retirement. Another is China's nearly 10 percent annual economic-growth rate over the past decade, which has made the stock market appear to be a safe bet.
More recently, many Chinese have been racing to withdraw money from bank accounts that are losing money.
In May, China's inflation rate rose to 3.4 percent over May 2006, the highest rate in 27 months and higher than the one-year bank-deposit interest rate of 3.06 percent. That means that the $2.2 trillion worth of citizens' deposits in Chinese banks are losing ground to inflation. Those who can are shifting money into the stock market.
"I have extra cash, and few options," said Fan Zang, 59, a retired state employee in Shanghai who's bought into some Chinese mutual funds, one of a growing number of Chinese who are turning to asset managers to play the market for them.
Should China's stock-market bubble worry Americans whose 401(k) retirement plans are tied up on Wall Street? The Shanghai exchange's February plunge prompted that question, but the answer for now seems to be no, since U.S. stocks rebounded quickly then and the Shanghai's 6.5 percent drop May 27 barely registered on Wall Street.
Global investors seem to have concluded that, for now, China's stock market remains largely divorced from its broader booming economy.
"It has very little foundation in the real economy. It is not a gauge of the health, for example, of the companies that are listed because it is so murky about how they are doing anyway," said Albert Keidel, a former top U.S. Treasury Department expert on China who's now a senior associate at the Carnegie Endowment for International Peace in Washington.
In fact, if China's stock markets plunge precipitously, it probably would register as little more than a blip in the country's booming economy.
"It's not going to be like Japan, where you saw a meltdown in the stock exchange followed by a meltdown of the (housing) property bubble, then a protracted recession," said Eugene Wang, the chief executive officer of Huangpu Enterprise Development Corp., an investment-management company in Shanghai. "Even if you see a big correction in the stock market, you are going to see very limited economic impact. It's a pretty isolated pocket."
The bigger risk is political, Keidel warned. If middle-class Chinese investors lose their savings on the stock exchange, they may take out their anger on the government. It's one reason that the Chinese leadership has tried to let the air out of the stock market bubble slowly with measures to discourage speculation.
The government is trying to avoid a bubble burst "that would have political implications with a lot of people losing wealth," Keidel said. "If you let the air out of the bubble this way, it can lend itself to political stability, which is what they're concerned with."
(Hall visited China as part of a fellowship with the National Press Foundation.)
Since 1996 in China:
Economic growth of nearly 10 percent annually over the past decade also has brought these financial challenges: