As an experiment in the reform of the financial system, stock markets have been opened in Shanghai and Shenzhen. A standardized method for the shareholding system and the transaction of stocks is being experimented with, the results of which will be put into use over a larger area.
Late in 1991 and early this year, when Party and state leaders Jiang Zemin, Li Peng and Yang Shangkun one after another went on inspection tours of the stock exchange in Shanghai, they talked about the sensitive question of the stock market and indicated that more stocks should be issued to promote socialist construction.
At the same time, Chinese mass media published many reports concerning this trend. As a result, stocks and the stock market once again became a hot item of concern to the public.
To keep abreast of the stock craze that is beginning to sweep China, a dozen or so newly published books on the operation of stock markets have been put on sale in book stalls in various big Chinese cities. In Shanghai, one can inquire about the stock market price at any time by dialing the phone number 3200200; in Beijing, the first school geared specifically towards teaching about stocks and stock markets has come into existence....
Various signs show that a golden age for the big development of stocks in China is drawing near.
Origin of the "craze"
Stocks are something new to many Chinese. Even people in their advanced years invariably linked it with the concept of capitalism and many turned pale at the mere mention of stocks. In 1986, when China conducted experiments with the shareholding system among enterprises and publicly issued stocks for the first time, people remained indifferent to them. Because of this, staff members had to go from door to door selling stocks. Despite the effort, only half of the total stocks issued were sold.
Then a change took place in 1989. In 1988 when interest and dividends were drawn from the stocks of the Development Bank, the first institution that sold stocks in Shenzhen, the interest rate reached 30 percent, four times higher than that of bank savings deposits. As the news spread, a sluggish stock market suddenly became brisk, and the price of the Development Bank stock rose from 20 to 180 yuan a share. The stock prices in other companies also saw notable rises. The stock price was jacked up by the principle of "when a thing is scarce, it is precious."
This situation also occurred in Shanghai's stock markets. The talk about high dividends and "becoming an upstart overnight" stimulated Shanghai residents' desires to make investments. Whenever new stocks were put on sale, people vied with one another to buy them. According to incomplete statistics, in Shanghai alone, currently 2 million citizens, about one-sixth of the city's population, are holding money with which to buy stocks.
It is the view of economists that the main reason people rush to buy stocks is because of the possibility of earning a substantial increase in their incomes. Statistics show that Chinese residents' combined savings deposits and cash on hand add up to a total of 1,200 billion yuan and increase at an annual rate of more than 10 percent. Since earnings from savings deposits are limited and there is no other area open for consumption and investment, people naturally turn their eyes to stocks, which have a large rate of increase, so appreciation and dividend income is greater than the interest rate on bonds.
A second reason for the rush is that the stock system is the product of the socialization and commercialization of production, not the sole property of capitalism. This change in concept is also an important factor for the emergence of the stock fever. Today, the sayings "the stock system is not tantamount to private ownership," and "allowing individuals to buy stocks is not tantamount to practising privatization" have become common public knowledge.
In fact, the advantages of stocks are evident in raising construction funds, improving the supervision of enterprise management, and promoting the development of production. In 1991, the Development Bank, the Jintian and Wanke companies, and two other old companies increased capital and expanded shares; 11 new companies issued new stocks, collecting funds from the public to the tune of 1.369 billion yuan. By issuing B-stocks in Renminbi, they raised funds in excess of US$ 100 million from outside China. Five of the companies transformed their stock system. In the first year after the transformation, output value grew by 100 percent over that of the previous year; and profits grew by 215 percent, enterprise net assets by 87 percent, fixed assets by 155 percent and taxes turned over to the state treasury by 253 percent.
The concept of risk
However, the unprecedented stock investment furore also brought a turbulent impact on the stock market. Since Shanghai's stock markets opened for business in 1991, investment in stocks has remained high and prices have continued to rise. In the middle of February this year, the price of the Shanghai Yan-zhong Industrial Company's stock was only 98.9 yuan, but the closing price on March 18 hit 352 yuan. The original value of the stock of Yuyuan Company was only 100 yuan; by closing time on March 18, however, the price had shot up to 4,329.1 yuan.
As soon as new stocks have been put on sale, residents have rushed to buy but have seldom sold them, feeling free from any worry of risk or crisis. This indicates many people do not understand what stock is all about. One Shanghai resident who bought some stocks said, "The price of stocks is rising every day. Buying stocks can make money, I don't care how things will stand in the future. I'll just wait and see."
"They are stock buyers who have no experience of stock disasters; they are immature stock buyers," exclaimed an international financial expert after making an inspection tour of Shanghai's stock markets.
The government and economists seem to be very calm in the face of the stock buying spree. However, the government's sincere advice to residents is now printed in the stock market quotation column in Shenzhen's newspapers: "The stock market involves risks." Economists have also called for steps aimed at preventing a "black Friday" such as has taken place in Western stock markets.
In order to prevent the steep rise and fall of stock prices, Shanghai once adopted the method of controlling stock prices. Although this measure held the stock prices in check to some extent, it also resulted in a depressed market. So, beginning in February this year, the stock price was decontrolled for some enterprises. On May 21, stock prices were completely decontrolled. Because stock prices were then regulated through the use of the market mechanism, the myth that there is only rise and no fall in the prices of Shanghai's stocks was broken, and the previously constant, strong stock prices began to fall. This change not only enlivened the stock market, but at the same time, it enabled Shanghai residents to wake up to the risk involved in the selling and buying of stocks. In the first five months of this year, Shanghai's stock transaction volume topped 5 billion yuan, three times that of the whole year of 1991.
It is reported that in order to meet people's growing desire to invest, the Chinese government is trying to increase stock share supplies to ease pressure on the stock market. In June this year, the issuance of stock from 34 additional Shanghai companies, having a total face value of 311.65 million yuan, was approved by the government. Stocks from 26 of these companies will be put on sale in the near future. Given this, the face value of ordinary stocks on sale in Shanghai's stock market will increase from the present 100 million yuan to nearly 400 million yuan, and the number of stocks from 14 to 40.
Through exploration and experimentation in the past two years, the stock markets in Shanghai and Shenzhen have begun to take shape.
On December 9, 1990, the Shanghai Stock Exchange was set up. Later, the Shenzhen Stock Exchange also opened for business on a trial basis. At present, there are several large stock companies, such as Shenyin, International and Haitong, which handle stock business in Shanghai. Under these stock companies are a dozen or so stock centres, employing a total of several hundred staff members. The number of organizations handling stock business in Shenzhen has increased from three in the early period to more than ten at present. The number of transaction centres has gone from four to 20, and the number of employees in the stock trade has increased from 34 to over 500.
The establishment of the stock exchange has resulted in a gradual change from scattered transaction and transfer to concentrated transaction and transfer. All stock buying and selling have been standardized, with sales and purchases done through stock brokers at competitive prices.
According to figures provided by the People's Bank of China, by the end of 1991 the total value of stocks approved by the state and publicly issued in Shanghai and Shenzhen had reached 3.3 billion yuan, of which 2.8 billion yuan, or 84.8 percent of the total, were public stocks, and 500 million yuan, or 15.2 percent, were individual stocks. There were 89 enterprises which had publicly issued stocks, 34 of which had put their stocks on sale in the stock market.
At present, the stock trading craze is heating up and spreading to other Chinese provinces and cities, where there is a growing demand for expanding the issuance of stocks and the establishment of stock exchanges. In the face of this situation, the Chinese government still maintains a prudent attitude towards the development of stock markets. Only qualified enterprises in places with great increases in savings deposits were selected to appropriately increase the amount of stocks issued, subject to the approval of the People's Bank. At the same time, a concentrated effort is being made to run the Shanghai and Shenzhen stock exchanges well as a means of accumulating experience. The establishment of new stock exchanges will not be approved for the time being.
This policy is supported by Chinese economists. In their opinion, the stock market is based on an improved stock system. Judging from China's present situation, there are still some enterprises which have improved that system. Such being the case, the main difficulties in the development of China's financial markets lies in conducting a genuine transformation of the stock system in existing enterprises.
Statistics indicate that by the end of 1991, China had set up more than 3,200 pilot enterprises experimenting with various types of stock systems. However, quite a number of enterprises whose stock system was not standardized and some pilot enterprises had violated the principle of equity equality and equal interest for equal share, setting a higher dividend rate for individual shares than for state and legal person shares. Also, some enterprises ensured both interest earnings and dividends; and some enterprises lacked a shareholder congress, a board of directors and a supervisory committee. Furthermore, decrees, regulations, and accounting systems are not well co-ordinated with the issuance of stocks. Under such circumstances, it is very difficult to expand the issuance of stocks and carry out stock transactions in various Chinese provinces and cities.
"In developing the stock system, we must avoid rushing headlong into mass action. Instead, we must create conditions in a down-to-earth manner and go about it step by step." That is the sincere advice of economists as well as the Chinese government's current policy.