Seeking Alpha in 1992 Shanghai

By Austin Dean

Recently in the main reading room of the Shanghai Municipal Library, the guy sitting next to me set up shop, though not to study or read. For most of the morning he had his eyes fixed on his laptop, keeping a close watch on the Shanghai stock market index and various individual stock prices. He looked about 19 years old.

Since last summer, it seems everyone in China has entered the market. As the Shanghai Composite Index continued to soar, it was too hard to resist taking the plunge, even as most indicators revealed an economic picture that was murky at best. By the start of this summer, the Shanghai market was up more than 100 percent since the last one; since the end of June the Shanghai index has fallen more than 30 percent from its peak.

Most theories about the market bubble connect back to the Chinese Communist Party (CCP). Take the CCP’s official nightly news show, Xinwen Lianbo. This program, the thinking goes, reveals important government policies that move the stock market.

As Bill Bishop, publisher of the Sinocism newsletter and a close observer of the Chinese investing scene, noted on Twitter, a Chinese acquaintance said he was fully invested when the Shanghai index was at 4100 because “who dares insult the Party.” The implication was the Chinese Communist Party simply wouldn’t let the market fall below that point. And that is bascially what happened. After the Shanghai Composite Index dropped to a low of 3500 on July 8, the Chinese government rolled out a host of policies to arrest a further fall. China was “destroying its stock market in order to save it.” After a slight rebound that lasted three days, the Shanghai Composite dropped three percent on Wednesday , July 15, closing at 3805.

Even if you don’t watch the national news program, you are never far away from sources of investment advice in China, which in and of itself might be a sign of a frothy market: books, internet forums, WeChat groups, and word of mouth all tell you how to invest your money. The whole genre of investment advice in China has exploded since the reopening of the Shanghai market in 1990 (reopening because there was a stock market in Shanghai before the People’s Republic was founded in 1949. You can find more information on the performance of the old Shanghai stock market here).

The Market: The Kingdom of Psychology by Jin Xuewei, a self-taught investment guru, is one of the originals of the investment-advice genre. The book came out in September 1992; at that time the Shanghai market had been open for about a year and a half. Most of the book is a combination of practical advice — what types of information to read — and exhortation: “You are your own best financial advisor,” and, “You can only master the market by mastering yourself.” The most interesting part of the volume comes at the end, when Jin analyzed who was making money in the Shanghai stock market in 1992 and why they were able to do so.

The first group having success were “professional investors.” These weren’t Wall Streeters dressed in suits, but people operating in the shadowy and shifting grounds of the Chinese economy as it began to open up. They were huangniu — middlemen on the make always looking for an angle. Involved in enterprises of varying legality, they put a lot of the proceeds from these businesses into the stock market. The huangniu, in a nod to official communist rhetoric, brought to mind Shanghai traders in the “old society” (jiu shehui) before the establishment of the People’s Republic. The mythical and composite huangniu figure was “Yang One Million” (Yang Baiwan), a short, nondescript man in his 40s with a big belly who excelled at collecting and interpreting information and favored taking big positions in stocks with not that many shares available. By 1992, the author felt the huangniu were moving their money out of the market; they needed to diversify their investments and had an eye on other areas.

If you took a trip down to the stock exchange in the fall of 1992 (and you had to physically go there to trade shares then), you wouldn’t find many in the crowd fitting the description of huangniu. Instead, you would find lots of neatly dressed people sporting glasses and cultured looks: Chinese intellectuals, people who had attended university. For the past year and a half, some intellectuals had been in the market, but only in a secretive sort of way. Part of their hesitance was cultural. Chinese intellectuals, Jin wrote, had been taught to look down on commerce for thousands of years and did not want to be associated with the likes of the huangniu. Another factor was more practical: imagine if they saw someone they knew when going to trade stocks. How awkward! What would they say to each other back at their work unit?

But by the fall of 1992 this stigma had begun to fade. Intellectuals were doing well because they were hesitant and cautious by nature, only moving into the market when they understood what it was. Jin insisted that Chinese intellectuals — famous for empty talk (kongtan) and inaction — were making good returns in the market. Of course, there is an equally valid point about intellectuals as investors that the author ignored: an expert in one area might overestimate the transferability of that knowledge into a new domain. Conducting open-heart surgery does not have anything to do with picking stocks, but a hotshot surgeon might think it does. Apparently Chinese intellectuals in 1992 were immune from this psychological trap.

The third group of people able to make money in the market but faced the most risks and needed the most help — hence the purpose of writing the book — were the average investors. These investors did not have the connections and daring of huangniu or the caution and logic of the intellectuals. Their biggest enemy was themselves. Unfortunately, as Jin constantly reminded readers, the hardest person to control is oneself.

The final group Jin describes — a group that didn’t need his book to guide their investments — were the “mysterious institutional investors” (shenmi de jigou touzizhe). These institutional investors had lots of money and resources that usually came from public money (gongkuan), bank loans, or loans provided by a certain work unit (danwei). Jin didn’t come out and say it clearly, but the money and the personnel behind these institutional investors mostly traced back to the government. It paid to be associated with officialdom.

Jin Xuewei is still in the business of giving investment advice. On June 29, he posted a piece on his blog titled “Why I Say the Bull Market Isn’t Over.” Oops.

I hope the guy sitting next to me at the library wasn’t listening to him.

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