Sieren's China: Shanghai's stock market soars

One might think that current developments at the Shanghai stock exchange could bring back some bad memories. Prices have risen by 28 percent since mid-November and by 50 percent since the summer, only to plummet suddenly last week. This week they rose again, more than making up for the recent heavy losses. But the last time share prices shot up so fast was seven years ago, with disastrous results.

The bubble burst. Share prices tripled in a matter of months but then slumped to their initial level. Many Chinese lost a lot of money, not to mention their faith in the stock market. Prices have been stagnating ever since. Investors have preferred to leave their money in savings accounts, where interest rates are low. But it appears that the mood has changed. Have investors forgotten everything they've learned? Are they about to repeat past mistakes?

Another slump unlikely

But a renewed slump is unlikely. There is a simple explanation for last week's upward trend. For the first time in two years, the central bank slashed key interest rates last month and foreign investors got to play the Chinese stock exchange. As of last month, brokers in Hong Kong can help investors from all over the world buy shares in Shanghai. In the past, only a few were allowed to buy shares in Chinese businesses.

Most of them were institutional investors, handpicked by the Chinese government. But now they've had their day. The total volume of the equivalent of 1.7 billion euros which can now be invested from abroad per day is bringing a lot of money into China. Foreign investors are keen to secure themselves a pole before Chinese markets become even more accessible in the next few years. At that point, even more money will flow into China.

The fall-out from international crises

Likewise, Chinese investors are no longer restricted to domestic companies but can also invest abroad via the Shanghai stock exchange. For China, this marks a major step towards status as one of the world's major stock markets. But the move also brings its own risks: China's stock market will now be increasingly vulnerable to international influences. During the 1997 Asian financial crisis and the 2008 world financial crisis, China remained stable thanks to the fact that speculators didn't have a foot in its door.

In both cases, Beijing was not forced to devalue the Chinese yuan and was able to keep its promise of a fixed exchange rate with the US dollar. But now, if China is to be internationally competitive, it needs to open up. IT companies are among those most likely to make friends with international investors. Baidu, Tencent, Lenovo and Huawei are all profitable companies poised to conquer world markets. They will serve as the foundation for a new equities culture in China.

What will also stop investors turning their backs on Chinese stock markets is Beijing's pledge to stem the gray market that has grown massively in recent years. The over-heated property market also no longer promises much yield. Both these factors have left Chinese investors at a loss to know what to do with their funds. The stock market boom couldn't have come at a better time.

DW columnist Frank Sieren has lived in Beijing for 20 years.