China’s Leaders Confront Their Manic Market

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Investors in Shanghai followed stocks at a securities firm Tuesday. Shares traded in yuan fell Thursday after setting records earlier in the week.

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HONG KONG, May 24 - WANTED: Central banker who can curb "irrational exuberance" among stock market investors. Statesmen with international credibility preferred. Availability soon.

Too bad Alan Greenspan, who does not speak Chinese, can't apply. One of the biggest challenges for Chinese leaders these days lies in when and how to rein in the country's soaring stock market and, just as important, whom to pick as the next governor of the central bank.

The challenges are closely intertwined. Like Mr. Greenspan nearly a decade ago, Zhou Xiaochuan, the current governor of the People's Bank of China, faces the knotty question of what to do about a speculative mania that has drawn millions of people with limited investing experience into betting their savings on the stock market.

Mr. Greenspan, now 81, struggled to contain the tech stock boom, issuing his famous "irrational exuberance" warning in December 1996 only to watch the American market keep rising and finally collapse in early 2000. He tried his hand at forecasting Chinese stocks on Wednesday, telling an audience in Madrid by satellite that the Chinese market was "clearly unsustainable" and could undergo a "dramatic contraction."

After setting records on Monday, Tuesday and Wednesday, the A shares, those traded in yuan, fell 0.47 percent in Shanghai and 0.6 percent in Shenzhen on Thursday as investors responded to the warning.

But the warning was not news to Mr. Zhou and other Chinese officials. The central bank, securities regulators and prominent business executives have all been cautioning investors that buying stocks is not a guaranteed path to riches - all with less apparent effect than Mr. Greenspan.

"Will the Shanghai market correct at some stage? Yes, that's inevitable," said Michael R. P. Smith, the chief executive of HSBC's extensive Asian operations. "Valuations are too high, I think; you can't sustain P/E multiples of 40, 50 times."

The economy is booming, but fairly low inflation, 3 percent, also makes for a conundrum similar to what Mr. Greenspan faced as Federal Reserve chairman: it is harder for Mr. Zhou to justify raising interest rates significantly.

For Mr. Zhou, there is a further complication in that he faces considerable uncertainty about his personal future. Five years into his current job, he turns 60 next year, and so by Chinese standards is due for a transfer or promotion.

"It could come at any time; I tend to think it will happen before the 17th Party Congress," expected in October or November, said Victor Shih, a Chinese banking specialist at Northwestern.

Whoever succeeds Mr. Zhou confronts one of the toughest challenges of any financial policy maker. Chinese families eager to make money are opening brokerage accounts around the country, with the number of new accounts rocketing from several thousand a day two years ago to nearly 300,000 a day this month.

Investors leaving a Shanghai brokerage firm on Wednesday were exuberant, as the Shanghai A share index closed at 4,354. Chen Zhiwei, a restaurant chef, said, "With more new stocks listed, the bullish trend will keep going until the index hits 15,000."

Like Mr. Greenspan in the heat of the Internet frenzy, Mr. Zhou and his colleagues in the Chinese government have been cautious about trying to pop the bubble themselves.

The Chinese government chose administrative measures, instead of market forces like higher interest rates, to prevent the economy from overheating in 2004 and to curb real estate speculation over the last two years. The government has taken a few such measures this year, like investigating fund managers to make sure that they do not engage in self-dealing at the expense of their clients, and requiring this week that new brokerage customers sign forms acknowledging that they understand the risks of stocks.

But stocks sailed higher on Wednesday after an announcement by the finance ministry and State Administration of Taxation that the government had no plans to raise taxes on share transactions, an approach the government has sometimes taken in the past to curb speculation.

Cash is pouring into the stock market partly because money is pouring into China in general. With the Chinese government intervening heavily in currency markets to hold down the value of the yuan against the dollar, China is on course for a surplus this year of up to 0 billion in the current account, the broadest measure of trade.

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Rujun Shen in Shanghai contributed reporting.

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