China’s Fling at Stock Ownership Is Curtailed Quickly

Late last year, the official newspaper China Daily asked: “Can a socialist economy have a stock market?” It quickly answered: “Here in Beijing, no one seems to question its necessity.”

At the time, Shanghai had just opened a stock market for the first time since the Communist takeover of 1949, other cities were moving in the same direction and Chinese leaders in Beijing even gave a warm welcome to New York Stock Exchange Chairman John J. Phelan Jr.

But now, after only a few months, China’s attention-grabbing experiment with stock transactions is being so sharply curtailed that its future is in doubt.

New rules issued by the government this month bar China’s large state enterprises from issuing any new shares of stock. The Shanghai stock exchange is not being permitted to expand beyond its original, minuscule size. And the Communist Party organ People’s Daily cautioned last month that developing a stock system should not be considered one of the goals of China’s economic reform program.

Chinese officials list a number of factors for the dramatic reversal of direction, but the principal one appears to be ideological.

Many older, tradition-minded leaders within the Communist Party think that issuing or trading stock is incompatible with China’s socialist system. Since last December’s student demonstrations and the ensuing resignation of the party’s general secretary, Hu Yaobang, such officials have increased their strength within the party.

“There are some arguments in theoretical circles about how much in the way of shares individuals should hold,” acknowledged He Ling, a correspondent for the Shanghai-based World Economic Herald, the newspaper that had crusaded for several years for the opening of a Shanghai stock market.

“In terms of theory, some economists argue that if we have the share system in enterprises, this will mean that the characteristics of state-owned enterprises will change. According to (Chinese leader) Deng Xiaoping, economic reform should be based on public ownership. We may have different ideas of what public ownership is.”

When the city of Tianjin opened its new securities market April 1, it was permitted to handle only bonds, not stocks, for four state-owned enterprises.

“The allegation that China has developed or will soon develop stock exchange systems equivalent to those of the Western world is groundless so long as the country sticks to the socialist economic and financial system,” asserted Gao Zhiling, a Tianjin city official.

The change of attitude by the Chinese regime is most noticeable here in Shanghai, which has been trying to regain its former role as an East Asian business center.

Last summer, Chinese officials permitted the city of Shenyang in northeast China to open China’s first securities market since 1949. It was a limited experiment, in which bonds of two industrial enterprises were publicly traded in a market controlled by the government-owned People’s Bank of China.

On Sept. 26, amid considerable fanfare, authorities permitted the start of stock trading in Shanghai. In an enthusiastic report on the event, the official New China News Agency quoted one financier as saying, “The tension and the atmosphere remind one of the stock exchange before liberation (the Communist victory in 1949).”

But the Shanghai market has not flourished. At the moment, only two stocks are being traded on the exchange--the same two that were available when the market opened. Their prices have varied within only a narrow range. The only other securities available are the bonds of three state-owned enterprises.

Furthermore, instead of developing a single, centralized location for securities trading, like a Western-style stock market, authorities have set up a diffuse system under which the shares are quietly bought and sold at four different financial institutions in separate locations around Shanghai.

One is the Shanghai A. J. Finance Corp., which opened for securities business Feb. 5. A. J. is the first non-government financial institution in China, set up several years ago with the money from overseas Chinese and from Shanghai businessmen who stayed on in the city after the Communist takeover.

Want to Buy, Not Sell

“The amount of shares on the market is very small,” said Huang Tseliu, the deputy general manager, in a recent interview. “Right now, we don’t really have a stock market, but what you would call over-the-counter trading.”

Officials explain that many Chinese want to buy stocks or bonds at the moment because they pay dividends or interest a few percentage points higher than the savings deposit rates of 7%. But far fewer people are interested in selling the new securities, and thus there is little in the way of a market.

No foreigners except for overseas Chinese are permitted to buy stock shares on the Shanghai market. Permitting such transactions would raise politically touchy questions about foreign ownership and speculation in Chinese industries. Foreigners are permitted to buy bonds, in effect loaning money to Chinese enterprises.

The new rules handed down this month by the State Council, China’s Cabinet, seek to funnel securities transactions toward bonds instead of stocks for Chinese as well as foreigners.

The rules say that, from now on, China’s state enterprises, which produce roughly 70% of China’s industrial output, can raise capital only by issuing bonds, not stocks. Moreover, before selling bonds, the state enterprises will have to obtain the approval of the People’s Bank of China, the nation’s central bank.

In Shanghai, even those institutions that had previously obtained permission to sell shares of stock are scaling back.

Sales Restricted

Last fall, the Chinese regime took the first steps toward introducing some competition within the nation’s banking system by reopening the Bank of Communications, an old Shanghai bank once controlled by allies of Nationalist leader Chiang Kai-shek.

At the outset, the idea was that the new bank would receive half of its capital from the state and the other half through selling shares to Chinese enterprises and individuals. Now, bank Chairman Li Xiangrui said in an interview, the bank has decided to restrict the sale of shares to individuals.

“The original plan was to issue shares in denominations of 500 renminbi ($135 at the official rate of exchange). Then we changed it to 100 renminbi ($27). There will be a limit of two shares per individual.

“We don’t plan to raise money too much from individuals,” said Li, who until last fall ran the Shanghai branch of the People’s Bank of China. “If we just issued the shares (without limits), the people would be lined up down Nanjing Road (the main street in downtown Shanghai) to buy them.”

The change of direction concerning stock markets is to some extent a reflection of even broader confusion over the ownership and management of Chinese enterprises.

For the past two years, Chinese officials have been considering various drafts of new legislation that might answer some fundamental questions about Chinese industries.

Who owns the assets of a state enterprise? Is it the central government or each individual enterprise? Who would be responsible if an enterprise were allowed to go bankrupt? Is the Communist Party the ultimate authority inside a factory, or should there be independent factory managers? The National People’s Congress, China’s parliament, has repeatedly delayed enacting laws that would address these issues.

Some of the controversies have nothing to do with concern over individual stock ownership. Even if private individuals were forbidden to own any shares at all, there would still be wrangling over how much autonomy the state enterprises should have.

Permitting a state-owned enterprise to issue shares of stock and to retain or trade some of them gives the enterprise more independence from the central government.

“We have not solved the problem of how much of an enterprise’s assets the state should hold and how much the enterprise should hold,” said He Ling of the World Economic Herald. There is concern, he said, that the state--that is, the central government--could lose too many of the assets it now holds.

Still, most of the opposition to stock markets and share holding in China comes from those who believe that they are a departure from socialist and Marxist orthodoxy.

Last December, in an effort to defuse the ideological controversies, Li Yining, a Beijing University economist and a leading proponent of economic reform, argued that permitting workers to own shares in their own enterprises is compatible with socialism because it gives workers more power.

“To my mind, the post-reform stock-holding enterprises are also a new kind of public ownership where groups of laborers are masters of the means of production,” he wrote. “The participation of the socialist state in share-holding enterprises will work through the government holding the controlling shares. In theory, this should mean the government holding at least 51% of the shares. In fact, it need only hold one-third, or two-fifths, sometimes even less.”

In a commentary last month, however, the People’s Daily rejected Li’s argument. Stock ownership is not the right way to achieve worker power, the paper said.

“The economic basis of the status of socialist workers as masters does not lie in whether workers own stock in an enterprise, but rather in the establishment of the socialist ownership of the means of production and in the fact that the publicly owned means of production are used for the benefit of all workers,” the Communist Party newspaper declared.