The surest sign of China’s remarkable economic success was when President Jiang Zemin traded his Mao Zedong suit for Giorgio Armani and became the Gordon Gecko of Asia.
Like his fictional movie-tycoon counterpart, Jiang’s slogan could be “greed is good”. Under his guidance China has become an economic powerhouse with stock markets that would make Mao spin in his tomb.
The road to economic reform and a market economy began in the late 1970s when the Chinese government issued savings bonds to individuals. They weren’t tradable, but it was something.
In December of 1990, Beijing decided it was time to restore the city of Shanghai to its former glory as a money centre and the financial capital of China. The Shanghai Stock Exchange opened for business after a 50-year break. Less than a year later, a regional exchange, the Shenzhen Securities Exchange, was opened in a special economic zone near Hong Kong.
The two exchanges were opened as an experiment to help raise capital for the modernisation of state-owned enterprises. There are very few privately owned companies in China and none are listed.
Trading on these experimental exchanges was limited to class “A” shares which could only be held by Chinese citizens in a few state-run companies. Class “B” shares were introduced in 1992 -they were denominated in hard currencies and reserved for foreign investors.
The two exchanges boomed in 1992 and 1993. The bust came in 1994 and small investors were sidelined. The exchanges kept up the roller-coaster ride and ran up to dizzying heights again in 1997.
Like many emerging markets, the Shanghai and Shenzhen exchanges suffer from periods of booms and busts. A handful of well-connected and savvy investors are able to amass fortunes while the small investor risks losing everything.
There is not much market sophistication on mainland China and investors are more interested in making a quick buck (or yuan) than in long-term growth, and rumours or tips rather than fundamental analysis direct decisions to buy or sell.
Government officials believed that China wasn’t ready for that kind of risk. For almost half a century its people lived under a system that left them with little or no individual initiative or responsibility. Although reform had begun in 1979, the people weren’t prepared to face the harsh realities of a market economy.
Chinese leaders felt they had to limit the risk involved in trading by keeping a tight rein on controls and issuing rules against speculation and price manipulation. They made the rules, but enforcing them hasn’t had much success.
The government cracked down, but they couldn’t regulate themselves out of all the ills facing the Shanghai and Shenzhen exchanges, especially for foreign investors. The Chinese stock market for foreign investors, the “B” market, has big problems – unlike the domestic investor market, which is much bigger and liquid.
Domestic investors who are barred from owning “B” shares still manage to skirt the rules and buy. Even with domestic buying, the “B” market has been sinking steadily and shows no sign of recovery. Most foreign investors want to get out, which is also a problem since the markets are infuriatingly illiquid. Stockbrokers complain that it can take a month to accumulate shares in Shanghai and several more to sell them.
Some analysts feel that merging the “A” and “B” markets would revitalise the ailing exchanges and encourage investors back into the market. But for now, brokers are advising clients to take money out of Asia because of the continued currency risk and Japan’s going nowhere economy. China’s red chips are out, for now anyway. But as one stock broker said: “In these markets, never say never.”
Only a few months ago, reforms such as privatisation of state-run assets were on schedule. Beijing hoped it would be able to weather the Asian economic storm and continue with growth led by exports and foreign investment.
Clearly that is now impossible. Foreign investment is looking for less volatile shores, exports are declining and consumer demand is at a standstill.
China’s deteriorating economy has also forced Jiang to order the People’s Liberation Army (PLA) to get out of the business of being in business. The PLA became the ultimate capitalists when former leader Deng Xiaoping encouraged them to get into business because defence spending was slowing down and money was needed to modernise the economy. As compensation, the PLA could exploit the money-making opportunities available through market reforms.
And exploit they did. The army’s business empire has grown enormously. The PLA has more than 15 000 military businesses which generate sales of up to $18-billion, about 2% of China’s gross domestic product, according to Kroll and Associates (Asia).
Beijing wants the military to divest itself of thousands of commercial enterprises, from drug companies to massive real estate holdings to telecommunications. The army’s unquenchable lust for wealth is disrupting the economy, and PLA-linked black marketeers are destabilising industries from oil to steel and may even be putting pressure on China’s currency.
Beijing is desperately trying to keep from devaluing its currency, not only to maintain stability in China, but in the rest of the region as well. Speculation that China will devalue had stock markets in a frenzy last week and exchanges in the region took a nose-dive. China’s Shanghai exchange was no exception, hitting a historic low and losing more than 40% of its value since the beginning of the year.
It may be awhile before Jiang gets to wear that suit in public again.
ENDS