Market Scene : China Dabbles in the Stock Market : The exchanges aren’t big but they are profitable. And now they are seriously debating opening the trading to foreigners.

Tony Ling figured he was into a sure thing.

During his first four months playing the fledgling Shenzhen stock market, Ling had seen a 50,000 yuan ($9,600) investment in shares of the Shenzhen Development Bank double in value.

“It’s very good,” he said cheerfully, adding that some of his initial funds came from relatives in the nearby British colony of Hong Kong. “Stock can earn you a lot of money--more than your salary, more even than Westerners make.”

In scattered centers of economic experimentation around China, there is a new wave of interest in stock markets and securities exchanges, and there is serious debate over the possibility of opening trading to direct investment by foreigners.

The small exchange here in Shenzhen, a rapidly developing Special Economic Zone that serves as a real-life laboratory for market-oriented reforms, comes closer than any other center in China to capturing the spirit of a real stock market.

Shenzhen is not alone, however. The growth of securities exchanges began with public trading of government bonds in the northeastern city of Shenyang in 1986. Over-the-counter trading in a small number of stocks began in Shanghai the same year. Securities exchanges were later set up in several other cities.

Last December, Shanghai opened a centralized exchange linked with brokers in various provinces around the country, thereby forming a kind of national securities market. Most trading on this exchange is in bonds issued either by the Chinese government or state-run enterprises. It also handles shares of stock in eight companies.

The Shenzhen exchange, which handles stock in five companies, has experienced several waves of speculative fever since opening in 1988. But it also has various special features that differentiate it from a Western-style market, including restrictions imposed last summer limiting how rapidly prices can rise or fall.

Expansion of securities markets to handle more trading in bonds, which basically are just another form of government borrowing, presents relatively few ideological and practical problems for the Chinese government.

But the official attitude to genuine stock markets is ambivalent.

Some Chinese economists argue that China’s market-oriented reforms cannot truly succeed without large-scale public sales of stocks in what are now state-run enterprises. The government, however, has authorized only limited experiments.

Hesitancy to allow rapid growth of stock exchanges arises largely from ideological opposition within the Communist Party to any rapid privatization of industry.

The difficulties are not just ideological, however. Shenzhen’s experience shows that practical issues also hinder the growth of stock markets. These include such questions as how to control corruption, how to educate investors about the risks they are taking, and how to establish fair rules to regulate the market. Shenzhen’s success or failure in solving these problems may have an important influence on the future course of China’s reforms.

The Shenzhen exchange has produced small fortunes for a lucky or well-connected few, but in recent months less fortunate investors have learned that stock markets can go down as well as up.

Ling, a 26-year-old office worker, was part of a wildly optimistic crowd of more than 200 would-be buyers who gathered outside a stock sales office in Shenzhen during a wave of frantic buying in late November last year.

For months, Shenzhen residents had witnessed a steady rise in stock prices on the local exchange. But profits were going primarily to government officials or people with personal connections to stock market employees. Limits on how rapidly prices could increase had created a situation where stock owners only rarely wanted to sell.

What few shares came onto the market were often sold by stock market employees to friends or acquaintances through what the Chinese commonly refer to as “the back door.” Ordinary people seldom had a chance to buy.

Then in November, new rules were announced restricting stock purchases by government officials and seeking to ban preferential treatment of investors.

The new rules brought more shares into the open market. This in turn led to several days of chaotic scenes, with crowds of hopeful investors gathered outside an over-the-counter stock office run by the Bank of China.

“Some officials are afraid and are selling their stocks,” Ling explained, echoing a common view. “So ordinary people can buy now.”

With price rises limited to 0.5% per day, demand still outstripped stock availability. A slight degree of order was brought to the chaos through an ad hoc lottery system, under which people drew numbers to win the right to purchase a limited number of shares. This contributed to a casino-like atmosphere.

“It’s not easy to get a lucky number,” commented a man who gave his name as Zhou.

Many in the crowd complained bitterly that corruption was enabling insiders to reap most benefits. Others were angry about the lack of order.

“The whole process is controlled by a group of very stupid people,” complained one man in the crowd. “The stock market is a very good thing, but it must be managed by smart people, and it must rely on some kind of rules. You must have some rules to run something. But there are no rules here.”

Despite all the anger and frustration, the general belief was that stocks had nowhere to go but up.

The government-run Shenzhen Development Bank, for example, had first issued stock in March 1990 at 3.56 yuan a share. Ordinary citizens, unsure of its real value and unfamiliar with stock markets, at first hesitated to buy. Much of the stock was purchased by government officials, who then saw its value shoot up 2000% in eight months. By November, even latecomers like Ling had made big money.

“Development Bank stock is sure to keep going up,” said a woman in the crowd, who explained her confidence by saying that government officials owned most of the stock and they would never allow its price to fall.

The buying rush of late November and early December, made possible partly by decisions of some government officials to cash in their stocks, gave hundreds of optimistic small investors their first real shot at the game.

Then, on Dec. 8, prices started to fall. The Shenzhen Development Bank peaked at nearly 80 yuan per share on Dec. 10, then fell to 61 yuan at the end of January. The average value of all shares on the Shenzhen exchange plunged 15% between Dec. 8 and the end of last year, then another 12% in January.

Prices have stabilized or turned marginally upward since. Shenzhen Development Bank stock was selling last week at just under 64 yuan per share.

Ling could not be reached for his views on these developments, but in general, ordinary investors seem to have taken the market’s fall in stride.

“The people of Shenzhen have a lot of endurance,” commented a Chinese journalist in the city, who spoke on condition that he not be identified in any other manner. “There haven’t been any troubles because of this.”

As the market fell, local government officials showed no signs of sympathy.

“Rises and falls are natural for stock markets,” a Shenzhen government spokesman coolly declared in an early January statement reported by the official People’s Daily. “This drop in stock prices is a good lesson for investors who blindly go along with the tide. It also has strengthened investors’ awareness that they are taking risks, and it has controlled the potential danger that stock prices would become too high.”

Officials seem to hope, however, to counter public suspicions of corruption before carrying out plans to expand the market with new share offerings.

The Shenzhen government publicly promised in late January that it will soon take a series of measures “to guarantee fair trading.” These would include, according to a report by the official New China News Agency, institution of “indirect management on the basis of law so as to alleviate administrative influence on stock prices.”

To Market, To Market in the New China

A crowd gathers outside stock exchange operated in Bank of China in Shenzhen. The exchange is one of several operated in Special Economic Zones around the country. Trading first started in Shenyang in 1986. Now, the exchanges serve as a real-life laboratory for market-oriented reforms in China.