China stock gains lift luxury spending

SHANGHAI —  Dai Yunping has never traveled very far from his home here. But next month, the baby-faced 27-year-old will indulge in a weeklong tour of Southeast Asia to the tune of $6,500. Upon his return, Dai plans to move out of his parents’ home and buy his own apartment in the old French Concession area.

Where’s the money coming from? Not from his family, nor his $650-a-month job at a trading company. Over the last three years, Dai has made more than $200,000 in the stock market -- and now he’s starting to live it up.

“I don’t hesitate anymore to go to expensive restaurants,” Dai said on a recent afternoon as he checked his accounts at a packed trading hall, a new $1,600 Hewlett-Packard Co. laptop slung over his shoulder.

Stock markets around the world have been wobbling amid turmoil in the American sub-prime mortgage industry and increasing worries about a possible economic downturn in the U.S. China’s stock market has bounced up and down too, but it’s mostly gone in one direction. The benchmark Shanghai composite index has climbed more than 350% since the start of 2006.

On Monday, in what has been a common pattern, the Shanghai index rose 1.5% even as every other stock market in Asia fell in the wake of the unexpectedly weak U.S. employment report Friday that raised fears of recession and rattled Wall Street.

Analysts point out that China’s stock market marches to its own beat. It is largely closed to foreign investors, yet money is gushing in from speculators, state-owned companies flush with foreign reserves and savings-rich Chinese citizens who have limited investment options.

Nowadays in China, stock investors are busy counting -- and spending -- their profits, producing the first signs of an emerging wealth effect, a term that describes how consumption rises as investors see the value of their stock portfolios increase.

Leo Wong, general manager of Shanghai’s Bentley dealership, is one beneficiary. This year, Wong’s shop has been selling 10 Bentleys a month, for about $400,000 each on average. That’s twice as many sales as last year. Wong figures half his buyers stepped up to a Bentley because of surging stock profits.

Managers of high-end restaurants and boutiques also say they’ve seen an increase in business in recent months. So have tour operators such as China International Travel Service, whose managers were stunned to see how quickly their new 12-day Mediterranean Sea cruise, at $4,000 a person, sold out this summer.

“I know the stock market is boosting our overseas travel sales,” said Zhao Dexiang, the company’s deputy general manager. Many of his customers, he said, belong to a travel club where they’ve talked about “wanting to take their families on more luxurious trips because they made quite a lot of money from the stock market.”

Economists say it’s almost impossible to measure the wealth effect in China because of a lack of reliable statistics. Most doubt the effect is very big at the moment, given that the boom in equities has benefited only a sliver of society. There are more than 100 million stock trading accounts registered with the Shanghai and Shenzhen exchanges, but most people hold dual accounts and many others have little or no funds in them, according to experts and government reports.

Still, a significant number of people in cities such as Shanghai have a direct stake in the stock market, and the ranks of mom-and-pop investors are swelling as elderly and other working-class people, hearing stories about their neighbors getting rich and being fed up with paltry returns from banks, are buying stocks individually or pouring money into institutional funds.

Retail spending in China has accelerated in recent months, growing at an annual rate of about 16%. The gains reflect higher wages and food prices. But it’s also likely that rising stock and home prices have helped boost consumer confidence.

In the spring, when the Shanghai composite index was climbing toward 4,000, the Chinese stock market was full of investor apprehension amid warnings of a bubble. Senior government officials and state-controlled newspapers spoke about the dangers of irrational optimism and risks to common people. In late May, Beijing suddenly tripled the stock trading tax, sending the Shanghai market tumbling 15% over several days and inciting anger among investors who chided the government for its heavy-handed ways.

But since then, as the index has shot past 5,300, there has been nary a word from Beijing about the heady market.

“There’s no news from the government because they know it would not be very effective,” said Liang Weipei, an independent stock analyst in Shenzhen.

Ordinary investors and analysts alike now believe that the government wouldn’t do anything rash before the National People’s Congress convenes in mid-October, lest it foment unrest and embarrass government leaders. In fact, many people are betting that China’s stocks will stay red-hot until at least the Olympics next August.

Government officials have more than political security at stake. Analysts say it’s likely that a large amount of the money that is flowing into the stock market is from government agencies and state-owned institutions. Chinese insurance firms, for example, are now generating a substantial chunk of their earnings from investment returns.

“Why would they want to spoil their own party?” said Fraser J.T. Howie, a financial analyst and coauthor of “Privatizing China: The Stock Markets and Their Role in Corporate Reform.” “It’s a very dangerous game they’re playing, and it’ll end in tears,” he said, but “things won’t pop until the Olympics.”

For now, stock trading halls in China are roaring with cheers. And that means more people will feel richer and act like it, even as a stigma against the wealthy persists in this nominally communist country.

Wong, the Bentley dealer, says many of his customers moved up from a Mercedes to a Bentley because of their stock market gains. One buyer, he said, was glad that Bentleys were less well known in China. That’ll keep him from standing out too much. But just in case, Wong said, the buyer put a Hyundai license plate cover on the car.

“If anybody asks, he says, he tells them it’s a new Hyundai model,” Wong said.

--

Cao Jun in The Times’ Shanghai bureau contributed to this report.