Blockbuster run for China's Nasdaq

By Li Hong, People's Daily Online

The wild swings in China's newly-born high-tech stock market, or ChiNext board, has once again verified that Chinese investors, both institutional and individual, are getting increasingly notorious for speculation. The phenomenon, though puzzling most market watchers, also reflects troubling management of one of the world's most nascent capital markets.

Designed as an alternative source of financing for "starved" start-up business ventures, ChiNext has seen a wild swing since its inauguration. On the first day of its official debut on October 30, all 28 listings skyrocketed as investors bought them as they just found a gold mine. On average, the prices of the 28 listings shot up more than 110 percent, with the shares of some companies soaring as much as 210 percent.

However, during the second session of their transactions, an avalanche swamped the market. Over all, the price of the 28 shares fell 8.5 percent, and 20 of them tumbled by the daily limit of 10 percent. By the end of the third trading session, 13 shares dived by more than 8 percent. Now nobody is for sure when ChiNext will stop bleeding.

Many investors are crying foul play on the Internet as their investments have evaporated, but few feel sympathetic for them because the regulators and analysts had warned them of huge risks if chasing for the hi-tech stocks at the first trading day. The astronomical gains that day obviously blinded and trapped many gamblers.

In the hope of replicating the success of Nasdaq in China, the Securities Regulatory Commission, the regulator, has launched a glaringly bold move, or a trial reform to test the waters, I would prescribe.

Tens of thousands of small private- run businesses now see the market as their best avenue to garner financing, which they usually cannot get from Chinese state-owned lenders. Whether ChiNext can succeed in creating a more efficient money market regime, channeling private capital to more and more start-up technology and innovation ventures, is to be seen.

But, the big ups and downs at the first three sessions are dreadful, and most investors hope for a quick stabilization. Despite lofty anticipation that the listed start-up companies are privately-run, technology-groomed, and possibly highly growing in the coming years, they contain unfathomable risks. As Nasdaq records have taught us, many companies initially listed there have withered, and been eliminated from the board.

Some outsiders say China's stock market is somewhat "flawed", because it has nurtured investors' appetite for big risks. In 2007, a bull run, similar to the pre-crisis housing bubble in the United States, led the Shanghai stock composite index to more than 6,000, a historical high. It never last. The rally quickly paralyzed and within four months, the index minusculed to less than 2,000 points.

However, the wild volatility hasn't dented Chinese investors, who are known to favoring momentum buying and selling rather than the underlying fundamentals of a listed company. In the case of the brand-new ChiNext, exceedingly high valuations of the 28 companies, agreed by the regulator, hadn't dampened the exuberance of the investors, they chose to gamble big, and probably will stay in the trap for some time.