China's decade-old experiment with stock markets is getting mixed grades from the country's own economists as reports of widespread manipulation and fraud continue to surface.
The Shanghai and Shenzhen exchanges last year outperformed most other bourses around the world. Their combined capitalization has exceeded $500 billion, ranking them third in Asia behind Tokyo and Hong Kong. But many observers do not believe the numbers reflect true market forces.
Noted economist Wu Jinglian, a confidant of Premier Zhu Rongji, recently warned that the Chinese markets are "worse than a casino" and are becoming a haven of crony capitalism. "Excessive speculation could lead to the collapse of the market," Wu told state media earlier this month.
Five other economists, headed by Peking University scholar Li Yining, rebutted Wu's remarks, acknowledging abuses while calling for recognition of the stock markets' achievements and contributions to the economy.
"The debate is mostly a disagreement over methods," said Zhong Dajun, head of the Beijing Economic Research Center, an independent think tank. "Nobody is suggesting that the markets should be shut down."
Last week, the China Securities Regulatory Commission announced the results of a probe that found eight of 10 fund-management firms had illegally bought and sold their own shares to jack up stock prices and engaged in other "abnormal trading activities." More than 30 senior fund-management personnel were punished, according to state media.
An investigation by the Shanghai stock exchange last year found evidence that the prices of 140 stocks had been illegally manipulated.
Zhu, who is China's economic czar, has refused to publicly take sides in the debate, analysts say, for fear of sending markets soaring or crashing.
"Zhu's comments would probably have a greater effect on China's policy-driven markets than [U.S. Federal Reserve Chairman] Alan Greenspan's would have on Wall Street," Zhong said.
In China, much of the information available to investors about companies is fraudulent, including financial reports, corporate prospectuses and even listing authorizations. In January, government auditors reported that more than two-thirds of 1,290 state-owned enterprises they had audited had falsified their 1999 accounts.
Zhong said many of the markets' flaws are inherent in their design. They were originally intended to raise capital for state-owned enterprises from the public, instead of state-owned banks. Private companies now account for about 3% of the exchanges' 1,100 listed firms.
Firms are authorized to list stocks not based on profitability, but on quotas for different industries and regions. The Shanghai and Shenzhen indexes have climbed steadily, not so much because of corporate performance, but because listings are a scarce commodity and new investors and capital keep piling into the market, chasing a limited number of shares.
It's doubtful that Beijing wants to risk instability by busting speculative market bubbles. But the China Securities Regulatory Commission has recently taken several badly needed reform measures, staggering the markets' bull run in the process.
This week, the Shanghai exchange partially suspended trading of retailer Zhengzhou Baiwen's stocks after it posted its third consecutive year of net losses.
The firm can get a year to restructure and reverse its losses. Otherwise, it will become the first company in China to be delisted.
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Shanghai's Hot Market: Too Hot?
An index of 546 stocks traded on the Shanghai stock exchange and available only to Chinese investors has soared since 1995. But the value of Shanghai-listed stocks available only to foreign investors had risen far less--until the government opened that market to local investors as well Feb. 28.
Shanghai "A" share index of stocks available only to Chinese, quarterly closes and latest
Pctg. change in Shanghai indexes, Jan. 1995-Feb. 2001:
"A" share index (Chinese investors): +256%
"B" share index (foreign investors): +59%
Source: Bloomberg News