Chinese discover first rule of investing - what goes up must come down

She frowned through her glasses at the flashing numbers on the giant screen, trying to assess what they meant for the pension money she had invested. The bad news came as little surprise: this year, each trip to the retail brokerage has left her feeling queasy.

"Everything's falling, and my shares are falling too. I feel a bit ill because of the money I've lost," she admitted with a wince.

The retired supermarket administrator, who did not want to give her real name, is one of millions of Chinese investors to discover that shares can go down, and down, and down, as well as up.

Last year, as stocks soared, people stampeded into the market. Customers at her brokerage, a CITIC Securities branch in east Beijing, rose five-fold to 25,000 between the start of 2006 and the end of last year. Its manager, Gu Xiaoyi, estimates that 60 million Chinese people now trade shares.

In a little more than six months, the benchmark Shanghai composite index doubled, passing the 6,000 mark in October. Since then it has nosedived to less than half that level - yesterday closing at 2941. Many analysts believe it would have sunk further by now had the government not intervened.

Small shareholders have been badly hit; some have lost their life savings. A few have even killed themselves in despair as their losses mounted.

Most seem unable to stay away from the brokerages. On a busy day, 500 cram into the dingy CITIC room. Regulars sit from open to close of each session, bringing cushions to pad the hard red plastic chairs. Keeping half an eye on the screen, they chat, sip tea from flasks and play cards. Other investors crowd around terminals, using swipe cards to check their own stocks or offering advice to friends and strangers alike.

Zhou began trading here last year, seduced by glossy brochures on stock issues and the hope of better returns than a savings account - particularly with inflation outstripping interest rates. "I read loads of material and it said the next decade would be the golden years for the Chinese stock market because the economy was developing," she explained.

"We started buying stocks and it was very, very good. When the index reached 5000 I didn't sell because it was still growing. But then it fell by 10% - then another 10%, then another.

"I tried to break even by buying more, because I thought the cheap stocks would go up again. So when the index hit 4,000 I bought. Then it went down to 3,000.

"Now I just want to sell them off and stop dealing. It's too much of a risk."

So far Zhou's investments have lost her 10,000 yuan (£740), more than two-thirds the average annual income in urban China. Despite her disenchantment, she has yet to bail out; maybe, she said, the index would hit 6,000 again in a year or two.

Gu acknowledged that many customers know little about buying shares or reading the market. "Last year, loads of people just ran in and started buying stocks because someone had told them it was a great time to do it," he said.

"Ninety-five percent of them didn't know what they were doing or what they were buying. It was only when it dropped so dramatically that they realised it was actually quite risky."

He argued that the ups and downs were typical growing pains for a new market, suggesting that investors were becoming more sophisticated and regulation improving.

"In the west you have hundreds of years of history in the stock market and it wasn't always stable ... It's through the highs and lows that you learn," he added, suggesting that the market was "basically stable" now.

Several analysts suggest that it is settling down now that last year's bubble has burst. Others believe that assessment is optimistic, and argue the downward trend will continue.

"The economy is slowing down ... The stock market will also continue to slide," said one analyst, who asked to remain anonymous.

Certainly, there is widespread anxiety about the economy and in particular inflation. Last week, Stephen Green - the influential head of China research at Standard Chartered - warned: "The golden years are over, at least for the moment."

Yan Yuanrun at West China Securities argued: "Although the market is not very mature, it is still very much connected to the macroscopic economic development."

Others argue that it bears little relation to the overall outlook, or even the performance of individual companies, and has clear links to government policy.

"If you want to invest in the Chinese market, the only thing that matters is what the government will do tomorrow," said Michael Pettis, a former banker and now professor of finance at Peking University.

"Don't waste your time trying to figure out who's profitable and who's not - it doesn't matter."

Most of the financial world believes the government is determined to keep the Shanghai index above 3,000 or as near as possible in the run-up to the Olympics, if not beyond.

Analysts point to a range of recent action, from cutting stamp duty and restricting the sale of shares freed from lock-up periods to ordering mutual funds not to issue stock.

"Every time we get close to 3000 there's a new flurry of announcements aimed at boosting the market," said Pettis.

"It's a very dangerous game because every time the government intervenes in a non-fundamental way it loses credibility. It undermines the development of a real and fundamental investor base and strengthens the existing dynamic.

"The market shot up 5% before the announcement [on stamp duty] and 10% afterwards - but now it's retraced all of that."

While experts fret about the future, most small investors are simply hanging on in there. Some seem paralysed by their losses; others, curiously sanguine, comparing investment with the fun of placing a bet.

Taxi driver Peng Desheng did not even know what stocks his family owned - he had simply told his wife to "go and spend some thousands of yuan" last year, but was unperturbed by the decline.

He said: "It's like gambling: you need the courage to lose a bit of money or what's the point? You might as well spend all your money on steamed buns and sit at home eating them."