Taking stock

Prohibited since 1949 as a "tool of the capitalist exploitation class" communist China's first two stock ex-changes were established at the end of 1990 in the Special Economic Zone of Shenzhen, bordering Hong Kong, and in Shanghai. Official estimates put the number of individuals owning enterprise shares or bonds at somewhere between two and three million. About half of them, Xinhua News Agency reported, "have been rewarded handsomely."

With rising inflation officially at 6.2 per cent and as high as 12 per cent in big cities, people not only invest heavily in consumer goods and gold jewellery but want to make their money work. Not all of them realise that speculating is a tricky business. Cases abound where would be winners have fallen victim to the market.

In May -last year, a Chinese investor killed himself after he lost about 6,500 yuan (US$1000) on the Shanghai stock exchange. In June, hoards of small share holders beseiged the annex of the Shanghai stock exchange in an at-tempt to offload their stocks. When police proved unable to stop the crowd, trading had to be suspended for some days.

The climax came in August, when Shenzhen police fired tear gas to disperse thousands clamouring to participate in a lottery whose winners would be allowed to buy US$55m worth of shares. Prior to the riots there have been widespread reports of hue gains to be made by dealing in stocks

Altogether over a million people got involved in the chaotic run on about 300 lottery counters. There, operators acting on their superiors' orders, handed out the sought after forms to relatives, police officers and insiders raising accusations of rampant corruption by local officials. In the ensuing, brawl dozens of people got hurt and observers wondered whether the whole operation would grind to a halt.

Far from that, the leadership brushed the "Shenzhen riots" off as a "relatively small matter". Vice premier, Zou Jiahua took over the handling of the situation and Beijing officials were eager to assure Chinese and foreign speculators alike that "this won't be allowed to affect the cause of reform and opening up". Pledges were made to end stocks corruption and to bring about some share holder democracy to still communist China.

To take off the heat in Sense, immediate measures included the absorbing of more stock companies from other places into the city's securities exchange, the setting up of two new stock companies and three fund administration companies and allowing firms from out-side to issue stocks on the exchange.

At year's end after a Communist Party Congress which enshrined Deng Xiaoping's "socialist market economy into society, officials responsible for the pandemonium were demoted or other-wise punished and China was closer to a more regulated stock market.

There are many indications that the leadership regards stock markets as vital for the transition to a market economy. Economists are eager to utilize the idle funds in the hands of individuals who on average put aside 38 per cent of their in-come into savings' accounts.

Liu Hongru, a vice minister of the State Commission for Restructuring the Economy pointed out in the People's Daily, that the share holding system is designed to collect that money to solve the shortage of funds in the country's construction. It also would help, he said, "to reform the industrial structure and improve the vigour of state owned enter-rises". These, although outdated and Foss producing to the staggering amount of US$27 billion in 1992 alone, are still seen officially as the "pillars" of the economy.
Suggestions by western analysts that the issuing of stocks indicates a first step to the eventual privatisation of enterprises are frowned upon. "Public ownership", it is claimed, will continue to play the major part in the national economy.

Meanwhile however, the stocks craze is on. Enterprises are scrambling to get their shares listed. Industrial strongholds like Tianjin, Shenyang, Bening, or Fujian and Sichuan provinces are increasing the pressure on the central government to allow them to establish their own stock exchanges. So far, the State Council's Securities Committee and the affiliated China Securities Supervision and Ad-ministration Committee?both set up in October 1992 to strengthen the "macro management" of the market without direct interference by the government ? are not allowing other cities to open stock markets.

Instead, it was announced that public issuance of stock might extend to all parts of China this year. The official Xinhua News Agency reported on January 2nd that, according to an unnamed source, "the securities administrative authorities will allow each of the provinces on the mainland to select one or two of their share holding companies with a good business performance to be listed in the Shanghai and Shenzhen Exchanges within this year."

This is tantamount to an official green light for public issuance of stocks in areas other than Hainan, Fujian and Guangdong, the only three provinces so far allowed to do so. Also, the government has initially set the figure of public issuance of stocks on the mainland at around five billion yuan this year.

Last year, the number of listed shares in Shanghai and Shenzhen increased to 70 from less than 20 in 1991. Of these, 18 were B shares ? for foreigners only and quoted in dollars. The current total value of stocks listed in the two bourses stands at over 100 billion yuan. The transaction volume, according to Xinhua, was around 100 billion yuan, nearly 30 times the figure of 1991.

While the growth of the market is welcome news, last year also laid bare the weaknesses of the system. The structures of most of the shareholding companies are not standardised. Some enterprises still employ an accounting system incompatible with international practice, thus making it difficult for Foreign investors to read their financial statements. Also, the capital of many share holding companies is not properly evaluated by authoritative institutions, leaving room for unreliable financial statements.

Beijing and local authorities see the absence of unified rules supervising the issuing and trading of shares and the lack of legislation to guarantee the interests of investors as the main cause for all of this. That is, where the drafting of China's 'first securities trading law comes in. So far the draft, designed to bring about greater transparency and stricter control on the markets, has been rewritten three times. Those in charge of the drafting are reported to have studied markets in the United States and in Asia, especially in Hong Kong, Singapore and South Korea.

The draft was again discussed at a seminar in Beijing early last December held jointly by the China International Trust and Investment Corporation (Citic) and the prestigious Beijing University. The law is now expected to be ready for deliberation by the annual meeting of the People's Congress next March.

Apart from this law, a whole set of stipulations and guidelines is on the way, in order to bring the securities industry on track. According to the official Xinhua News Agency, those will include regulations on the management of securities institutions and dos and don'ts for securities brokers.

As for the outlook for this year, analysts predict that the market would be more stable, as most investors were taught a lesson by the drastic fluctuation of prices during 1992. Indexes then soared as high as 1,400 and 700 points in Shanghai and Shenzhen respectively in July, after the government lifted control on share prices in Shanghai. Then they went down to a record low of 180 points in Shanghai and 170 points in Shenzhen in mid-August. From late July to November, around 60 per cent of private share holders were believed to have suffered heavy losses.

One way to stabilise prices and avoid the market becoming wild that is being considered is the possible entry of public funds such as those for pension and social securities into the stock market.

More immediately, the authorities recently took several technical steps to improve on the market set up and the dealing in stocks.

China Southern Securities Co Ltd (CSSE) was established officially in Shenzhen as one of China's three largest securities companies, the others being the Shanghai based Guotal Securities Co Ltd and the Beijing based China Securities Co Ltd. The new CSSE claims a capital outlay of one billion yuan and will open branches in 10 cities across the country. In 1993, branches are planned in Hong Kong and Macau as springboards to the international market, says the company's executive president Mr. Fu Shifeng.

As of February this year, Hong Kong media reported, investors in Shanghai will be able to buy and sell the same batch of B shares on the same day.

Also, according to People's Bank of China officials, the country intends to set up an integrated electronic satellite linked securities trading network. The system might be operational in a year from now.

In the meantime, the Shanghai Ex-change's stock listing computer, on December 16th last year, was linked directly to Reuters Integrated Data Net-work. Thus, Shanghai securities prices are issued within seconds worldwide. Although the Shenzhen Exchange is not a party to this, the network carries its share quotations as well.

In Beijing, China's first paging net-work for stock trading information was set up. As Xinhua reported, the system is designed to broadcast relevant information only 35 seconds after they were re-leased in Shanghai and Shenzhen. The network also provides information about foreign exchanges as well as flight and train schedules.

Starting from January 3rd this year, China Securities News, the first nation-wide distributed newspaper on stock trading at home and abroad hits the newsstands. The bi-weekly is published in Beijing with satellite transmission of plates for simultaneous printing in Shanghai, Guangzhou and Wuhan. *