Foreigners absent Anonymous. The Economist. London: May 17, 1997.Vol.343, Iss. 8017; pg. 85, 1 pgs http://proquest.umi.com/pqdweb?did=11777170&sid=20&Fmt=3&clientId=68814&RQT= 309&VName=PQD Abstract (Document Summary) During China's first bull run in stocks, in the early 1990s, foreign investors succumbed to the temptation of the exchanges in Shanghai and Shenzhen. They got badly burned. Now, Chinese shares are sizzling again. But this time, foreign money is on the sidelines. The foreigners may be missing something. China has gone share-crazy. There are now said to be 25 million-30 million individual stockmarket investors in China. Full Text (687 words) Copyright Economist Newspaper Group, Incorporated May 17, 1997 ONCE bitten, twice shy. Nowhere does that aphorism seem more apt than in China's stockmarkets. During China's first bull run in stocks, in the early 199os, foreign investors succumbed to the temptations of the exchanges in Shanghai and Shenzhen. They got badly burnt. Now, Chinese shares are sizzling again. But this time, foreign money is on the sidelines. In the midst of an emerging-markets share boom, this may be surprising news. But after earning almost nothing from the biggest economic miracle the world has ever seen, foreign investors are not keen to leap in now. Joan Zheng, an economist in Hong Kong for J.P. Morgan, an American bank, reports that even stock buyers who deem American shares expensive are keener on Latin America than on China. Closed-end funds that invest in China trade at record discounts to their net asset value, giving a measure of their unpopularity amongst foreigners. The foreigners may be missing something. China has gone share-crazy. There are now said to be 25m-30m individual stockmarket investors in China. In several mainland cities, crowds buying shares spill out of brokerages, blocking traffic. One taxi driver recently boasted to The Economist's correspondent that he had made 20,ooo yuan ($2,400), more than his annual salary, just that morning. (He still expected a tip.) Demand has spilled over from Shanghai "A" shares, which only mainland Chinese may buy, to "B" shares, which are supposedly reserved for foreigners. With most foreign institutions long since out of the market, Chinese punters have broken the rules to buy these shares, because they trade at a hefty discount to their A-share equivalents. Late last year editorials appeared in the Communist-controlled press warning that tough measures would be taken against speculation. Shares slumped by a fifth over just a couple of days, which may have alarmed officials as much as it did investors. So these days the government merely talks about throwing sand in the wheels by raising by a little bit the stamp duty on share trading. It still regularly warns Chinese investors out of the Bshare market, but few take notice. For Chinese investors are still convinced that the government will soon start easing interest rates again, giving a further boost to share prices. They are probably right. The economy is taking a worryingly long time to get over the consequences of its 1992-93 boom and the subsequent contraction. Neither industrial growth nor retail spending is strong. Meanwhile, there is huge excess capacity in many sectors of the economy. China is trying, with some recent success, to export its surplus production. Still, GDP growth has slowed to a 9.4% annual rate, from 14% four years ago. The government is seeking to juice the growth rate up again. But a lot of the liquidity that the central bank is pumping into the financial system, and a lot of the credit that banks are extending, is going straight into financial assets. Foreign investors with faith in the economy's resilience have a problem finding something to invest in. The B-share markets in Shanghai and Shenzhen are tiny and illiquid, and the transparency of company management leaves a lot to be desired. On May 15th, the government signalled its displeasure with the wildness of the markets by firing the chief stockmarket regulator. H shares, Chinese equities which trade in Hong Kong, offer few choices and little liquidity. "Red-chip" shares, issued by mainland companies that are registered in Hong Kong, would be a better bet-if it were not for their outlandish prices. That leaves Hong Kong companies that either have large interests in China, or have stakes held in them by mainland entities. One Hong Kong stockbroker has christened these companies, such as Hong Kong Telecom and China Light and Power, "pink chips". Foreign investors helped the Hong Kong stockmarket to a new record on May 14th, suggesting that pink chips are now hot. It also suggests that, notwithstanding the handover on July 1st, foreigners who hope to make some profit from China's remarkable growth are wiser to try their luck in Hong Kong than in the riskier bourses on the mainland.