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China's Stock Markets Volatile After Warnings of Bubble

After last year's feverish stock market boom in China, the markets have shown signs of volatility in recent weeks after officials warned investors to be more cautious. Claudia Blume reports from Hong Kong.

China's stock markets boomed last year, with Shanghai's benchmark Composite Index going up 130 percent. In recent weeks, however, the market has been increasingly volatile, generating worries about this year's returns.

The index has swung up and down rapidly in recent weeks, on some days moving as much as five percent. It is down about eight percent from its record high of 2,994 points, which it hit last month.

Liang Zhou is the China research manager in Shanghai for Lipper, a company that studies investment fund performances. He says the volatility was mainly triggered by warnings of an overheating of the market.

"From the newspapers we can see many news, information from experts, professors, even the officers from the government," he said. "They express their worry about the hot market and remind the investors of the bubble of the market."

There is a risk that a stock market that rises too rapidly will become over-priced, and eventually will collapse. China's central government wants to make sure a collapse does not leave millions of investors angry that their life savings have been wiped out.

Beijing has taken a number of measures to prevent that bubble from getting out of hand.

Howard Gorges, vice chairman of the South China Brokerage in Hong Kong, says the government has limited the number of mutual funds to keep more cash from pouring into the market. He says the Chinese government has also ordered banks to step up the scrutiny of loans to prevent borrowing for stock investments.

"Apparently a number of customers have been borrowing money or using their houses to get loans to buy stock and in China they forbid banks to lend money for stock purchase," he explained. "They wanted to stop everybody [from] gearing up and thinking that stocks had just one way to go, and that was up!"

Chinese are known for their love of gambling. With no legal gambling outlets in the country, millions of investors are rushing to buy stocks and mutual funds instead, often investing in companies that lack good business operations or solid finances.

It is a problem that Chinese officials acknowledge. One vice chairman of the National People's Congress recently said that only 30 percent of the companies listed in Shanghai are worth investing in by Western standards.

Gorges says that Beijing will put more proven, profitable Chinese companies on the Shanghai stock market to ensure there are plenty of good quality investments available.

"If you provide more script [shares] for the market, that should help keep the market more stable," he explained. "When if you have a limited amount of script and infinite amount of money going at it you have got a problem."

Gorges thinks China's stock markets will be more volatile this year, but that for now, the government appears to have the markets under control.