Panic as Chinese markets crash

China's fledgling stockmarkets collapsed yesterday after a warning from the Communist Party that recent frenzied increases in share prices were "abnormal and irrational".

The People's Daily, in a front-page commentary, said: "The present overheated state of China's share markets makes us think of the stock crash in America in 1929."

The move was a rather clumsier version of what Alan Greenspan, the chairman of the US Federal Reserve, did to American markets earlier this year. But as China moves closer to resuming sovereignty over Hong Kong - one of the world's most important financial centres - it will inevitably raise questions about the ability of Peking to handle modern capitalist institutions.

Within minutes of China's two exchanges opening for business in Shanghai and Shenzhen, most shares had dropped the full 10 per cent maximum allowed under a new rule which came into effect yesterday to limit daily movements. Panic- stricken small investors queued outside share-trading offices around the country desperately trying to sell shares, but most were unable to offload their stock before trading was halted. In Shanghai, phones at stockbrokers were jammed with calls from would-be sellers.

"The government's cheated us," one man shouted to foreign reporters outside a Peking share-trading company, after failing to sell his shares.

The number of shareholders in China has doubled this year to more than 21 million. Most of the new investors entered the market over the past few months, enticed by soaring share prices. Losing money is a new experience for them and the government's attempt to cool speculation also risks sparking a wave of anger among the smaller punters. Most market analysts expected further 10 per cent falls today and maybe again later this week.

Chinese investors are allowed to buy so-called "A" shares, which until the recent set-back had tripled since April in Shenzhen, and doubled in Shanghai. Over the past month, that boom had spurred a surge in hard-currency denominated "B" shares, which are officially restricted to foreign buyers, but are increasingly purchased on the sly by local investors. Shanghai B shares had jumped 80 per cent since 11 November, and Shenzhen B shares about 100 per cent, before the nose-dive started.

The People's Daily article, trailed the night before on national television, warned investors that the government would not step in to help if the markets plunged. It told the public that the safest place to put its money was in the bank.

Many stockbrokers and analysts said the tone of the article was unduly harsh. "This is very, very disappointing and outrageous," said one.

The government experiment with stock exchanges, which started in 1990, has been deemed a success as Chinese companies were forced to produce increasingly accurate and regular financial statements, and could also use the market to raise funds for expansion. For investors it provided an alternative to bank savings especially when interest rates, as this year, were cut.

n Peking (Reuters) - Chinese Premier Li Peng yesterday formally appointed shipping tycoon Tung Chee-hwa as the first post-colonial chief executive of Hong Kong.