China Curbs Shenzhen Bourse

NOT long ago, cash seemed to sprout from the trees on Red Lichee Avenue, nicknamed China's Wall Street by brokers in this southern boom town. Share prices on the fledgling Shenzhen stock exchange surged daily for months as demand greatly surpassed supply. Black marketeers operated from morning to midnight. Hundreds of people gathered on the curbside below brokerage houses to trade the shares of Champaign Industrial, a textile company, as well as banking, transport, and property firms.

A large, self-proclaimed vanguard of local Communist Party and government cadres ``took the lead'' in buying into the experimental market, which made millionaires of some investors.

But Beijing's ideological ax fell hard on the exchange in late November. Chinese leaders, alarmed by images of an unfettered capitalist bourse and an internal document detailing rampant ``back door'' stock speculation by cadres, ordered Shenzhen to clean up the market, local officials say.

Stricter ruled enforced

The city dutifully banned all trading by officials and military personnel, outlawed black-market deals, and imposed a narrow 0.5 percent margin on daily price fluctuations. The formal opening of a centralized exchange in Shenzhen, originally planned for late last year, was delayed indefinitely.

Rumors of an imminent political campaign against shareholders sent share prices down nearly 30 percent. Daily trading volume dropped in December from $6 million to $63,000 and remains depressed. The official China News Service recently warned that the market is on the verge of ``collapse.''

``Everyone is running from the market,'' said a Shenzhen taxi driver. ``I bought shares, but now I'm losing out.''

The stock crisis in Shenzhen illustrates how Beijing's hard-line leadership is clashing with free-wheeling coastal enclaves trying to advance the market-oriented reforms that brought them unprecedented prosperity since 1980. Conservative party leaders eager to reimpose Marxist values have criticized the expansion of private wealth as decadent and potentially subversive since June 1989, when they gained power after crushing mass protests for democracy.

Yet the survival so far of the embattled Shenzhen stock market suggests that despite ideological qualms, Beijing cannot afford to crush the enthusiasts on Red Lichee Avenue. With economic stagnation threatening to bankrupt the regime and provoke social unrest, the central government is begrudgingly backing limited shareholding schemes ``based on public ownership'' and other reforms aimed at boosting its revenue, recent policy statements suggest.

The government is ``totally and irretrievably broke,'' says Richard Margolis, a Hong Kong-based financial expert who has advised China on its shareholding system. Chinese leaders ``have convinced themselves that capital markets are the most effective way of tapping cash'' held by the public, says Mr. Margolis, a former British diplomat.

Warning of an ``extremely grim financial situation,'' Chinese officials predict that the budget deficit this year will surpass the estimated $2 billion shortfall in 1990. About 20 percent of central government spending is expected to go to subsidize chronically inefficient state enterprises, whose losses doubled in 1990.

Unhappy investors

Meanwhile, citizens unhappy with low interest rates are looking for new investment opportunities. Chinese saving deposits reached $135 billion last year. In addition, a huge store of cash is held outside banks, with unofficial estimates ranging from $40 billion to more than $100 billion.

``We have bought our TVs and refrigerators. Travel is restricted, and the state controls the purchase of cars,'' says a young Shenzhen broker, taking a break from a card game in his plush new office. ``So we can go out and burn cash every night, ... or open a beauty salon or small restaurant, but we lack other outlets for our money.''

Economists argue that injecting private capital into state-owned companies via stock and bond markets will put pressure on managers to increase efficiency, cut losses, and thereby reduce government subsidies.

``China's state enterprises have always had poor economic results because there is no real boss at the company, all assets belong to the state,'' says Zhang Yundong, a Shenzhen government economist. ``But when private individuals invest in a company, they pay a lot of attention to their money - and also to the country's money,'' Mr. Zhang says.

The popularity of Shenzhen's stock market since its launching in 1987 suggests the enormous potential for a nationwide shareholding system in China.

Demand for the $50 million worth of securities issued by the five companies publicly listed on the exchange is tremendous, with an estimated $1 billion in local savings chasing the shares. Eleven authorized securities houses have had trouble keeping up with the trade, which has been brisker on the black market.

More than 100 other Shenzhen firms have applied to go public, including Sino-foreign joint ventures, says Zhang. He expects 10 companies to win approval this year.

The enthusiasm for shareholding has spread beyond Shenzhen. Shanghai formally opened the country's first centralized securities exchange in December, while Fujian Province and other regions are making preparations to open bourses.

Dealing in state treasury bonds is far more widespread in China than stock trading and promises to remain so. Yet, while less than 20 Chinese companies are publicly listed, more than 7,000 have issued shares outside officially sanctioned bourses since the mid-1980s. Serious obstacles continue, however, to block the establishment of a national shareholding system despite support from among economists, provincial officials, entrepreneurs, and citizens.

Beijing's central planners demand that the state retain control over the majority of shares to support their creed of public ownership. In Shenzhen, this creates problems for state-run firms that seek to raise cash by selling shares to the private sector.

Reports that Shenzhen officials, including party chief Li Hao, have profited handsomely from stock deals have jarred the party's orthodox Marxists and prompted investigations by Beijing. ``We haven't really solved that problem,'' concedes Zhang. ``If [the officials] all sold out it would have a big influence on the market.''

Drafting new regulations

Such concerns have delayed approval by the Cabinet, or State Council, of formal regulations to govern the Shenzhen exchange. The regulations, vital to providing a legal framework for the bourse, are in their 13th draft, says a Chinese source involved in the drafting.

Moreover, direct government intervention in the exchange, such as the controls on price fluctuations, are distorting the market's functioning, critics write in the internal Shenzhen publication, ``Analysis of Stock Market Trends.''

The threat of arbitrary revisions of market rules worsens the herd psychology exhibited by Shenzhen's unsophisticated investors, who tend to buy madly when prices are rising and sell with equal frenzy when they fall.

``The Chinese stock market is still very primitive,'' says Wang Boming, vice president of China's Stock Exchange Executive Council. ``But I am confident that in five years it will be quite developed.''