Chinese Expand Their Emerging Stock System : State Retains Majority, but Many Firms Raise Capital Through Bond-Like Issues

A recent front-page story in the official Communist Party newspaper, the People’s Daily, told a short but extraordinary tale:

Qi Wenzeng, an executive of Gold Cup Automobile Co., had ventured on an unprecedented mission into Zhongnanhai, the high-walled compound where China’s Communist Party and government are headquartered.

His task, unimaginable only a few years ago, had a decidedly capitalist aura to it. He wanted to sell stock in his company to government officials.

In just two hours, Qi sold shares worth more than $8,000 to 25 State Council employees, according both to the newspaper and to a separate report by the official New China News Agency.

Four days later, the People’s Daily ran an equally extraordinary front-page retraction. The earlier report, it now claimed, was “entirely inconsistent with the facts.”

“There has never been any enterprise that has gone into Zhongnanhai to sell stocks, and none of the State Council employees in Zhongnanhai have bought stocks,” the newspaper said.

Outsiders may never know for sure whether the original story or the official denial comes closer to the truth. But the fact that the report could have been printed in the first place reflects how the once-scorned and still-sensitive idea of stocks has taken on new importance here.

All across China, thousands of enterprises have started to raise capital by issuing bonds and what they call “stocks.” Although some of the so-called stocks are actually structured more like bonds, others, such as those issued by the Gold Cup Automobile, a predominantly state-owned manufacturer based in China’s northeastern city of Shenyang, are very similar to stocks in capitalist countries.

Some Communist Party hard-liners still regard stocks and stock markets as capitalist evils, and even some of China’s reformers fear that workers and officials may abuse the shareholder system by dividing up public property for their own benefit.

But whatever the pitfalls, China’s leaders have indicated in recent weeks that this emerging stock system is to be expanded. Communist Party General Secretary Zhao Ziyang, in a conversation last week with the Nobel Prize-winning American economist Milton Friedman, said that one of three main tasks in China’s economic reforms is to restructure enterprise ownership according to a shareholder system.

“This will be an extremely big reform of our state enterprises,” Zhao said, according to a report in the People’s Daily.

Under the new system, the state will retain majority ownership of most important state enterprises, Zhao said. But the shareholder system should help ensure that even these enterprises take responsibility for their own profits and losses, he added.

The other two key tasks facing China are price reform and control of inflation, the party leader added.

Slowly Gaining Favor

China’s economic reform “aims to instigate effective capitalist management under the socialist system,” Zhao explained on another recent occasion, as paraphrased in a New China News Agency report.

A key symbol of capitalist-type reform in China is the Shanghai stock exchange. The exchange opened with great fanfare in fall 1986, but it soon suffered the chill of an “anti-bourgeois liberalization” campaign launched in early 1987 by ideological hard-liners.

For a few months, the future of the exchange, which at the time handled shares of only two companies, seemed in doubt. But leading orthodox hard-liners lost power at a Communist Party congress last fall. Now, stock markets in Shanghai and several other cities are slowly expanding.

“It looks like the central leadership has reached a decision,” commented Huang Guixian, the official in charge of the Shanghai exchange, which handles bonds as well as stocks. “The recent period has been for experimentation. I think we’ve now entered the period of development. We can now start taking larger steps.

“There will soon be nine companies listed on the market, and everyone feels that their experience has been good. Efficiency has been raised. They aren’t like some enterprises, where it’s always necessary to gather signatures of approval for everything. The general manager is responsible--he makes the decisions, and what he says goes. After the board of directors approves something, he can just carry it out.”

sh More Rules Being Drafted

Prices of stocks listed on the exchange are free-floating, based on transactions at two offices of the Industrial & Commercial Bank of China in Shanghai. The larger of these two offices, where individual investors buy or sell stocks and bonds across a counter, is the place that is usually thought of as the Shanghai stock market. But other institutions operate six more offices, where stocks are also bought and sold at the rate posted by the Industrial & Commercial Bank.

Foreigners cannot buy stocks on this exchange. But Beijing does not view Chinese from Hong Kong, Macao and Taiwan as foreigners, so they are eligible to buy shares. Rules that would allow foreigners and foreign enterprises to invest in stocks are being drafted.

One of the most prestigious of the six stocks listed on the exchange is the Shanghai Vacuum Electron Device Co., which makes about 25% of all the television screens manufactured in China, as well as various other kinds of vacuum tube. This company provides an important model for how China may develop large joint-stock enterprises in the next few years.

The city of Shanghai created the company in December, 1986, by merging a technical research institute and six state-owned factories that make television parts, according to Zhang Jingtang, director of the general manager’s office.

The company’s assets when it was created were valued at about $38 million, and plans were made to raise additional capital by selling $16 million worth of stock over several years, Zhang said. Once these stock sales are completed, the state will be left with 71% ownership, while the remaining 29% will be in the hands of employees, the general public and other enterprises or government agencies that purchase stocks, Zhang said.

Shares pay both fixed-rate interest pegged to bank rates and dividends based on the company’s profitability. Combined annual interest and dividend payments have been running at about 14% of the stock’s value.

“This company has a good future,” said Gao Tianming, 39, a shareholder who dropped by the Shanghai exchange one recent morning to see how his stock was doing. “China is one of the world’s major producers of color televisions, but supply does not meet the demands of the domestic market, and we also want to export some. Buying stocks involves risk. But we’re not afraid of losses buying stock in a company like this.”

Welcome to Attend

The company, which employs 12,000 workers at its original six factories and research institute, is expanding by acquiring interests in various other factories. It has teamed up with other enterprises to launch jointly owned new companies; it has a 75% interest in a foreign joint venture in Shanghai; it has a fully owned subsidiary in the South China special economic zone of Zhuhai, and it has bought minority shares of stock in profitable institutions, Zhang said.

“This way, in just two years, we have become a multilevel, inter-regional joint-stock group,” he said.

Each company whose stock is listed on the Shanghai exchange is run by a manager who is named by a board of directors. The board is in turn selected by a board of stockholders’ representatives. Major institutional investors and individuals who have purchased at least several dozen shares of stock are invited to sit on this representative board, but the details of how this is done vary from company to company.

As long as the governmental bureau that originally ran a state enterprise maintains at least 51% ownership of stock, it can continue to control the company through the directors. This allows reformers to say that the means of production are still predominantly state-owned and that the socialist system is thus being preserved. This argument provides reformers with a vital ideological defense against orthodox critics who accuse them of instituting capitalism.

At the same time, the shareholder system may open the door to much wider privatization of industry.

Although the government, represented by a Shanghai city agency, intends to maintain a 71% interest in the vacuum device company for the foreseeable future, it is theoretically possible that this share eventually could be reduced below 50% or even sold completely, Zhang said.

Private Sector’s Role

Shares could also play a role in privatization of small factories. In a report last month by the official China News Service, Li Yining, a Beijing University economics professor who is a leading theorist behind China’s reforms, was quoted as advocating that all state-owned enterprises run at the county level or below should either be sold in their entirety to groups of individuals or turned into joint stock companies.

China already has 13.7 million private businesses, mostly family-run, including 115,000 enterprises that employ nine or more workers, according to official statistics. This private sector handled 14% of China’s retail sales in 1987 and employed 21.6 million people.

While relatively few enterprises have already issued true stocks in the Western sense, groundwork for greater use of the shareholder system has been laid by the experience of firms such as the Shanghai Jin Ling Radio Factory. During the past three years this company, like thousands of others in China, has sold its employees gu piao --”stocks”--that are really bonds.

These so-called stocks pay interest pegged to the standard bank interest rate, which recently jumped to 9.2% from 7.2%, plus a fixed dividend of 7.8%. They mature in three years, at which time they must be returned to the company in exchange for principal and the final year’s interest, explained Zhong Zongyao, the company’s assistant director.

But next month, the company will offer its employees a new kind of gu piao that will have no time limit and will pay dividends linked to the company’s profitability, Zhong said. Shi Jiufu, head of the company’s financial department, said the firm hopes that next year it can issue yet another kind of stock to be sold not only to employees but also to the public. These shares, he said, could then be listed on the Shanghai exchange.