Regulators in China fret about stock surges

SHANGHAI, China - Record volume and growing volatility could disrupt trading on China's stock markets, the Shanghai Stock Exchange warned yesterday.

The statement from Geng Liang, the head of the exchange, is the latest sign regulators are alarmed over the market's recent surges.

"We must pay close attention to risks in the market, chiefly whether the technology system and trading platform can handle such large trading volumes," Geng said.

Trading volumes in Shanghai have soared since the beginning of the year, with turnover in the first two weeks at $154 billion compared with $772 billion for all of 2006, said the statement, posted on the exchange's Web site.

Last year's figure was triple the turnover in 2005, it said.

Trading volumes have jumped to records as investors have rushed into the market after seeing the benchmark Shanghai index more than double last year.

The Shanghai index, which tracks China's biggest companies, is up 9.5 percent so far in 2007. It closed at a record 2,975.13 last Wednesday, but a 4 percent drop the next day was an indicator of its volatility.

The Shenzhen index, which tracks the smaller of China's two exchanges, has soared 26.4 percent so far this year. Other world markets spanning from Tokyo to India have made equally stunning advances.

Andrew T. Foster, director of research at Matthews International Capital Management L.L.C., a San Francisco fund manager specializing in Asian investing, said the run-up in stocks in China followed growing investor confidence about wide-ranging changes officials had implemented in the last 18 months. Investors in mainland China are now able to invest in a growing pool of reputable companies.

"I think the underpinnings for this activity are generally sound ones," he said, referring to changes that have increased investor confidence. He cautioned, however, that more changes were needed.

"Chinese savers and investors have long had few opportunities to invest in high-quality companies because these markets were so poorly regulated and run. Perhaps the market is still lacking a lot of the reform that it needs to ensure a sound and safe place for Chinese households to invest for the long-term.

"There are still a number of companies, perhaps a majority of them, that aren't fit for public investment," Foster said.

Top Shanghai Exchange executives recently met to discuss issues facing them. The exchange noted the need for brokerages to upgrade technology and improve technical expertise.

Both Shanghai and the smaller exchange in Shenzhen have ordered brokerages to upgrade online trading systems to prevent disruptions, state media reported.

The Shanghai exchange could seek outside help to upgrade its technology. The exchange currently has a memorandum of understanding to coordinate on listings and other issues with the New York Stock Exchange, and could broaden that agreement.