Is China Really Going Capitalist? A Close Look Shows That It’s Not

This is the tale of a share of stock. It is the story of how much China has changed--and also how, in ways that America doesn’t grasp, it really hasn’t.

Eight years ago, Shanghai opened the way for China’s first stock trading since the Communist takeover of 1949. At the time, the securities market was extremely limited, more a couple of small offices than a centralized exchange.

Yet this was, for China, almost a revolution. For decades, books and movies in the People’s Republic had been portraying stock exchanges as dens of capitalist iniquity. One Chinese magazine described a stock market as “a jumble of flushed faces, bloodshot eyes and pallid hands, mixed . . . with the smothering, stinking odor of sweat.”

Soon after the first trading began in early 1987, I visited Shanghai and was permitted to buy a single share of one of the only securities then available, issued by the Shanghai Petrochemical factory. It cost me 100 Chinese renminbi, or (at the exchange rate of the time) $31.25.

I left China soon afterward, and that Shanghai investment has been sitting in a desk drawer at my home in Washington ever since. Last month, I took the old certificate with me on a trip back to Shanghai, determined to see how the Shanghai stock market was faring, and, not incidentally, what my modest Chinese portfolio was now worth.

The first discovery was that Shanghai Petrochemical is doing just fine, thank you. I invested in the right Chinese firm (not that I had any choice).

The company is one of the select few in China that, since 1993, have been trading on the New York and Hong Kong stock exchanges. While others of these Chinese stocks have plummeted in New York and Hong Kong, the shares of Shanghai Petrochemical have kept, and indeed increased, their value.

The huge factory complex southwest of Shanghai still looked like many of the other huge state enterprises throughout China in the 1980s. It was not so much a factory as an entire town, with its own schools, hospital, nursery, health clinic, shops and hotel.

Because of their venture onto the international stock exchanges, Shanghai Petrochemical’s top executives became vastly more cosmopolitan than any Chinese managers of the 1980s.

The day I visited last month, the president, vice president and three other Shanghai Petrochemical officials had just returned from a 10-day, five-city tour of the United States, where they gave presentations to American securities analysts at places such as a Ritz-Carlton hotel in the Los Angeles area.

“We had a lot of jet lag,” sighed Lu Yiping, the company’s vice president. On their previous trip, before the initial stock offering, the Shanghai Petrochemical executives flew from London to New York on the Concorde.

So does this mean China has “gone capitalist,” as Americans frequently imagine?

No. Not if you look more closely and ask a few questions.

Shanghai Petrochemical, the private stock company, was created from one of China’s mammoth socialist state enterprises, Sinopec, which is the Chinese petroleum ministry. Sinopec (that is, the Chinese government) owns 61%, far more than a controlling share, of the stock of the private company.

By American standards, Chinese factories are vastly overstaffed, and about 38,000 employees work at the Shanghai Petrochemical complex. I asked the Shanghai Petrochemical executives whether, in their meetings with stock analysts in the United States, they had been pressured to cut costs.

No problem, answered Lu. All the big, costly, money-losing divisions of the factory, including the hospital, clinics, schools and nurseries, have been kept under Sinopec, the government enterprise. Shanghai Petrochemical, the company whose stock is traded, includes only the factory’s money-making divisions.

In other words, the private stock company and the state enterprise work side by side, in a symbiotic relationship. The dominant partner, Sinopec, follows the principles of Chinese socialism, while the private company, Shanghai Petrochemical, trades on the stock exchanges and attracts foreign investment.

It seems almost like a shell game. Yet there was nothing clandestine about the way it was set up. Under the direction of Merrill Lynch, an army of American accountants and lawyers spent months at the factory complex, separating those parts of the factory that would stay with the state enterprise from those that would be included in the new private company.

If you read about China in places like the Wall Street Journal’s editorial page, which champions the cause of free enterprise, you will be told that China’s state enterprises are failing, while the private ones succeed.

Companies such as Shanghai Petrochemical show this distinction to be false. It’s all one system. The state enterprises take the money losers off the hands of the private companies so that the private companies can show foreign investors that they are profitable. Looked at another way, the state enterprises are China’s welfare system.

Much as Americans might like to think so, socialism isn’t dying in China; rather, it has a new face.

“Of all the major modern enterprises in Shanghai, very few are private,” observed a Western diplomat here. “I can hardly think of any major company in Shanghai that is not state-owned. When big foreign companies like Ford or Coca-Cola come here to invest, they look for state enterprises to be their partners.”

It turned out that the Shanghai Petrochemical security I bought in 1987 had really been more like a bond than a stock. At the factory and at a finance company in downtown Shanghai, officials explained that it had paid 12% a year in simple interest until it matured in 1990--at which time a savvier, more diligent investor than I would have redeemed it.

Now, in 1995, it is worth the same 136 renminbi it had been worth five years ago. And because the value of the Chinese currency has declined, that 136 renminbi now amounts to a little more than $16. In other words, the 1987 investment is worth about half of what it was in 1987.

“I advise you to keep it as a souvenir,” said Pang Jianxun of the AJ Finance Co. A good suggestion. That share of Shanghai Petrochemical will go up on the wall at home, right next to worthless early 20th-Century Chinese railroad bonds and other souvenir investments.

There have been plenty of changes in China since 1987, not least of all on the Shanghai Stock Exchange. It now trades in real shares of stock, the usual kind that go up and down and make fortunes and bankruptcies. Foreigners are allowed to invest too, but only by buying special “B shares.”

So I had an opportunity, before leaving Shanghai, to up the ante by buying some genuine 1995-vintage Chinese stock. Before doing so, however, I wanted to see the Shanghai Stock Exchange and witness firsthand the flushed faces and bloodshot eyes of the traders.

It wasn’t possible.

The previous week, there had been a big problem at the Shanghai Exchange. Authorities had halted trading in government bond futures and suspended five brokerage companies for illegal trading.

It turned out that, in a fashion somewhat akin to Orange County’s venture in derivatives, local governments around China had been risking their money through rampant speculation in bond futures on the Shanghai Exchange.

By the time I got to Shanghai, the stock market was in turmoil and the regulators were in the process of tightening things up. While they did so, nervous Shanghai officials made it clear the stock exchange was, at least temporarily, off limits to reporters.

If life teaches anything, it is never to invest in a stock market you can’t even see.