The Spread of People's Capitalism

IN early 1994, when four Beijing companies issued individual shares for the first time ever, Xia Yong was an enthusiastic investor. But now, after his company suffered hefty losses on its $1 million investment, the businessman is no longer so sure.

"Investing in stocks in China requires a hit-and-run strategy: Invest, then get out fast. China's stock market will remain shaky for some time. Long-term investment is risky," he says.

Their brief, roller-coaster ride in the market has left many investors confused and wary about the direction of Chinese financial markets. Almost five years after the Communist government allowed Chinese stock exchanges to open in the cities of Shanghai and Shenzhen, capital markets find themselves beset with volatility, scandals, regulatory weaknesses, a limited choice of listed firms, and a void of reliable information.

That contrasts with the first three heady years of the exchanges, when owning any stock seemed like a ticket to guaranteed returns. In Shanghai, for example, individual investors registered on the exchange jumped from 30,000 to 4.6 million in 1993, and residents boasted that every family in the city had at least one investor.

With thousands of state-owned companies scrambling to get listed and raise capital, investors regarded the outlook as bright and the stock future as stable, since the Communist government holds at least 50 percent of all listed companies' shares. The two markets have about 10 million investors - less than 1 percent of the population - and a combined capitalization of about $40 billion, on par with older markets in Argentina and Indonesia.

But two years ago, markets for A-shares, which are limited to Chinese citizens and traded only in Chinese currency, and B-shares, traded only in United States or Hong Kong dollars and restricted to foreign investors, tumbled dramatically and have slumped ever since.

In May, the Shanghai Securities Exchange was forced to suspend trading in Treasury-bond futures for the second time this year. The move was made to stop speculation and curb members' violations of regulations.

Ambitious government plans in recent weeks to sell $664 million in new equity over the next few years - mainly in communications, energy, high-technology, and raw-materials-manufacturing companies - sent the fragile, capital-short market down on fears of a share glut. Today, only about 300 firms are listed on the two exchanges.

Zhou Daojiong, chairman of the China Securities Regulatory Commission, pledges to control the "rhythm" of new share issues. But investors are skeptical of government promises to standardize market operations, tighten regulations, and speed up drafting a new securities law. Both domestic exchanges are vexed by company hesitancy to follow corporate disclosure rules and accurate accounting procedures. Only about half the listed firms submit acceptable annual reports.