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Tuesday, 7 August, 2001, 16:31 GMT 17:31 UK
China stocks reel as rulers disagree
Shanghai skyline from the Pudong business district
Pudong district: The home of Shanghai's stock market
China' stock markets have taken a nosedive as investors fear a crackdown on dubious trading practices.

Shares listed in Shanghai and denominated in foreign currencies - the so-called B-share market - fell 10% on 6 August alone.

At one point on 7 August, they looked set to repeat the performance, although in the end the B-share index closed down just 0.5%.

The slide on the less important Shenzhen market was only marginally less severe, and on both prices have fallen nearly 40% since May.

The trigger is a rash of state media reports, warning of an imminent government crackdown on trading practices on the B-share market.

Shanghai stock trader sleeps in a rare quiet part of the day
A rare moment in a Shanghai trading day

The volatile trading which characterises Chinese stocks has been exacerbated on the B-share market as Chinese citizens used their caches of foreign money - usually US dollars, kept as a protection against fluctuations in China's currency, the renminbi - to speculate.

The trend has seen the B-share market's overall value rise threefold since Chinese citizens were given access to it earlier this year.

Two evils

But it also presents a dilemma to the government.

On the one hand, the funds released from their hiding places under floorboards and mattresses are in demand. Creaking state-owned enterprises are desperate for capital to support modernisation.

But some of China's leaders are also nervous about the highly speculative and in some cases fraudulent nature of the trading, especially with admission to the World Trade Organisation coming ever closer.

Bad deals

Bank loans being illegally used to buy shares, thus diverting capital away from more concrete purposes - a practice that some unsourced reports in the Hong Kong press say is due to be squashed by September.

Worse still, bad and often downright dishonest trading practices are rife.

A business magazine recently revealed that one of the top performers on the less rocky, but still highly volatile, A-share market of companies listed in local currency has lied about its profits for the past two years.

See also:

19 Feb 01 | Business
China reforms stock market
01 Mar 01 | Business
China's stocks near record
24 Apr 01 | Business
China's exchange gets tough
18 Jun 01 | Business
China targets currency smugglers
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