Underground Stock Market Thrives in China : Finance: Illegal trading illustrates government inability to control experiments in capitalism launched in the 1980s.
Zhang Wei and Guo Rong take up their positions every morning outside the Hainan Securities Co. where they hustle people to buy or sell stocks--even though they are not employed by the securities firm.
They are part of an active black market in “neibu” or internal stocks. The government has authorized about 5,000 companies nationwide to issue internal stocks--for sale only to their own employees--to raise capital.
But thousands more companies, especially rural and private enterprises, are issuing internal shares without approval and selling them to any interested buyer. Black markets in the certificates have sprouted in most major cities.
The phenomenon illustrates the government’s increasing inability to control the new, capitalist financial markets it launched in the late 1980s as small-scale experiments.
The government is trying to develop the markets slowly, reined in by conservatives who disapprove of the speculation inherent in stock markets and who object to partial privatization of state-owned firms through share issues.
But Chinese investors, who have few places to put their money and regard stocks as sure bets to get rich, are eager for any chance to buy shares. Since only about 75 stocks are listed on the nation’s two legal exchanges in Shanghai and the southern city of Shenzhen, most people wind up going to the black markets to buy “internal” shares.
In Chengdu, a city of about 3 million in Southwest China, authorities allow the traders to occupy a stadium, where their shouts of buying and selling prices fill the air as if it were the Chicago Mercantile Exchange.
In Haikou, capital of the southern island province of Hainan, Zhang and Guo join a half-dozen other black market stock traders on the sidewalk outside the securities company. Large white sheets of paper placed at their feet list the names of companies whose stocks they are trying to buy or sell.
“It’s not illegal. But it’s not exactly legal either,” Zhang said.
Technically, that’s true, for there is no law on the books. But authorities ordered a halt to trading of internal shares in April. National stock regulations, issued in May, reiterate that companies may not issue shares without state approval. Violators can be fined up to 300,000 yuan--about $52,630 at current exchange rates.
Regardless of the legal risks, economists warn that investors in illegal shares are taking big financial risks. For instance, they may not be able to cash in their shares.
But traders and local officials alike ignore the warnings because the black market serves needs the government cannot: It gives ordinary Chinese a place to invest their money and provides a source of capital for rural and private enterprises, which have a hard time getting loans from state banks.
What happened in Hainan shows the impatience local officials feel toward the central government’s slow moves to expand China’s stock markets.
Hainan officials opened a stock exchange in March, 1992, without approval from Beijing and allowed trading in internal stocks. They hoped that, faced with a fait accompli , the central government would approve the bourse, as it did in Shenzhen.
The renegade stock market operated for a month, ignoring repeated orders from central authorities to close it down until Vice Premier Zhu Rongji visited and personally ordered a closure.
“Around the country, others were about to follow Hainan’s example,” said Chi Fulin, secretary general of the Hainan Institute for Reform and Development. “If the central government hadn’t closed it down, other places would have done the same thing.”
Closing the illegal stock exchange did not dampen local residents’ enthusiasm. Rather, the central government may have fueled even greater demand when, as a compromise, it allowed four Hainan companies to be listed on the Shenzhen exchange.
All four performed well. The most successful was New Energy Co., a private real estate development firm, whose shares soared from 17 cents to as high as $8.25.
Shareholders became wealthy overnight. One was Hu Jia, a lawyer, who was able to buy New Energy’s internal shares cheaply several years ago because her husband is friends with the general manager. She refused to disclose her post-listing profit, but her friends said it was substantial.
Many internal stocks traders believe it’s only a matter of time before all of Hainan’s 60 shareholding companies are listed in Shanghai or Shenzhen. But even before they are, there is money to be made. For instance, Zhang Tiantian, a young businessman, recently bought 1 million internal shares at their face value of 17 cents per share. He sold the shares for about 34 cents per share to a third party who resold them for even more.
“Everybody knows that stocks equals money. Everybody knows that as long as it’s a share, you should buy it. It’s guaranteed,” Hu said.
