As China Rises, Sinking Stocks Spark Middle-Class Protests

[HenryTo]

Great article on the sinking Chinese stock market in the WSJ this morning:
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Volatile Issue
As China Rises, Sinking Stocks
Spark Middle-Class Protests

Investors Accuse Communists
Of Hyping Market Outlook;
Dilemma on State Shares
Mr. Na Threatens Suicide
By JAMES T. AREDDY and PETER WONACOTT
Staff Reporters of THE WALL STREET JOURNAL
April 21, 2005; Page A1

BEIJING -- As dusk fell one day in late January, a Chinese investor apparently upset at his stock-market losses doused himself with gasoline outside the headquarters of the Chinese securities watchdog and set himself on fire. Regulators responded by placing a gag order on the Chinese media and putting a fire extinguisher near the building's entrance.

Ten days later, 30 wealthy Chinese showed up with a litany of complaints about lax market regulation and cheating companies. This time, three low-level staffers of the China Securities Regulatory Commission emerged to jot down the grievances as police filmed the proceedings. The regulators didn't bother taking names. One official explained her weariness to Cui Jingzhu, a 50-year-old former advertising executive who says she has lost more than $600,000 in the stock market.


"Too many" protesters, Ms. Cui recalls the official saying. "Every day."

As the market plumbs six-year lows, China's 60 million retail investors are an embittered lot -- sounding a jarring note amid the capitalist changes transforming China's economy. The government once touted the nation's two stock exchanges, started in 1990 and 1991, as founts of opportunity. But they have turned out to be full of rotten companies that relied on political connections to get listed. Regulators have had little success fighting rampant insider trading and poor disclosure.

For the ruling Communist Party, the rage of investors who have lost their nest eggs could be toxic. The party has long struggled to keep a lid on social unrest, especially among unemployed workers and overtaxed farmers. Now a big chunk of the middle class is angry, too. In a recent online survey of 200,000 people by the official Xinhua News Agency, the poor-performing stock market ranked as the biggest concern, beating out corruption, the No. 2 worry, by a 3-to-1 margin.

Even as China's economy grew 53% between 2000 and 2004, the Shanghai and Shenzhen benchmark indexes fell by more than one-third each. The tradable shares on the two exchanges are collectively worth just $150 billion, about the same as Denmark's stock market.

Premier Wen Jiabao acknowledged in March that many people are angry. "We should admit that regarding how to establish an all-around securities market, we are not knowledgeable or experienced enough," Mr. Wen said at a news conference. But he vowed to fix the problems, saying the government would make the market "open, fair and transparent" and improve the quality of companies selling shares.


Perhaps the thorniest issue is the state's stake in listed companies. The state owns about two-thirds of all shares, and rules prohibit them from being publicly traded. In 2001, the government hinted it might sell shares, then withdrew the idea when the market plunged. However, over the long term investors are unlikely to be attracted to a market overwhelmingly controlled by the government.

Last week, the government announced plans for a "trial sale" of some holdings. Some investors welcomed signs that the government might lighten its grip on the market, but others fear that oversupply will push down share prices. The government has also begun taking a somewhat stricter line on misconduct. Last December, five executives of a Shanghai-listed dairy giant, Inner Mongolia Yili Industrial Group Co., were arrested on suspicion of stealing company funds. Prosecutors are still investigating the case and formal charges haven't been filed, says a Yili official.

Aside from the political damage, the lackluster stock market represents a long-term drag on the economy because it has failed to develop into a source of capital for promising companies. Chinese banks lent more money last year -- about $2.3 trillion -- than the total capital raised by stock listings since the founding of the two exchanges. The banks' exposure to bad loans represents a bigger short-term threat to the economy than the stock market, Chinese economists say.

The public expressions of displeasure with the stock market, as well as the recent wave of anti-Japanese demonstrations in China, reflect a culture of protesting that has grown over the past decade. The government now accepts protests over corruption, pollution and other disputes as routine, so long as the protesters don't attack the core principles of Communist rule or challenge top leaders.

But the stock-market protests lay bare an especially sensitive issue, because Chinese leaders are thought to closely monitor the market. In a nation that lacks polls to measure top leaders' approval ratings or independent media outlets, the direction of share prices is one of the few genuine barometers of public sentiment.

In the early 1990s, the stock market was the jewel of the nation's economic-reform program. Hordes of investors snapped up shares on the exchanges in Shanghai and Shenzhen, a city that borders Hong Kong. By 2000, the average price of a listed company was nearly 60 times earnings. A much-discussed June 1999 front-page editorial in the Communist Party's main newspaper, People's Daily, was titled "Firm Confidence" and declared that China's securities market was "facing uncommon opportunities for development."

Many individual investors interpreted such language as a virtual guarantee of good results. Today they increasingly blame the government for their losses. Regulators have adopted a few quick fixes, such as cutting the "stamp tax" on trades to 0.1% of the trade's value for both buyer and seller, down from 0.2% last year. But they have shown little appetite for addressing more fundamental problems such as late disclosure of market-moving news and faulty financial statements.

"Is the China Securities Regulatory Commission willing to be a tougher regulator?" asks a former senior commission official. "I don't think they are willing to be so tough. ...They don't want to offend interest groups like local governments that are behind many securities firms and listed companies."

Three former senior commission officials say they were often blocked from inspecting financial records of suspect companies, with local police sometimes aiding the obstruction. About three years ago the commission received its own police unit so it can negotiate with the local police for access but cooperation is still sporadic, say the former regulators. The commission declined repeated requests for interviews with its officials.

Ultimately, fixing the market is a matter for top Communist leaders, not the commission's staff, says Anthony Neoh, formerly the top securities regulator in Hong Kong and a longtime adviser to the Chinese commission. The dilemma for Chinese leaders is that a serious tightening of the stock market's standards probably wouldn't boost prices in the short term but would anger Communist insiders.

One case that shows how well-connected companies can lead investors astray is Sichuan Topsoft Investment Co. Formerly a state-owned machine-tool company, Sichuan Topsoft got backing from provincial leaders who hoped to turn the southwestern province into a technology hub. In addition to developing software, the company touted the prospects of an industrial park for mobile-phone and laptop-computer production.

Investors piled in. Only later did they learn that Topsoft had guaranteed $210 million in loans to related companies. That was nearly twice Topsoft's assets and violated a regulation that says loan guarantees can't exceed 50% of a company's assets. By the time regulators discovered this, Topsoft's chairman, Song Ruhua, had sold his stake in Topsoft's parent company to two senior executives for a total of 24 cents, and fled to the U.S., say Sichuan stock regulators. Mr. Song couldn't be located for comment.

In a July 2004 statement, Sichuan Topsoft's new leaders said they were conducting an investigation and promised: "Problems, once found, will be reported to investors in a timely fashion." They haven't announced any new developments since then.

Shao Yonghua, a Shanghai investor, says he lost $97,000 after buying Topsoft shares. The 53-year-old former salesman had to call his son home from studies at a Swiss business college because he couldn't afford the tuition. Mr. Shao says he felt cheated by state-run media that pumped up the stock market. "Companies weren't listed for their quality," he says. "I'll persuade my son and other young people to avoid the stock market."

Investors' anger is often directed at brokers. Na Keyan, an engineer from the northern city of Harbin, says he paid a $3,600 fee to Yinhua Investment Consulting Co. in early 2004 after watching a program on state television that praised the firm's acumen in picking stock-market winners. Mr. Na says he lost money on his first trade following Yinhua's tips, and was down $24,000 in savings by that autumn.

Last November, Mr. Na took a train across China to Yinhua's headquarters in Chengdu, the capital of Sichuan Province. He sneaked past guards into the office of Yinhua General Manager Zhong Gangping. There, Mr. Na sat down on a black leather sofa and pulled a long cord from his computer bag, making it look like the detonator for a bomb. He asked Yinhua to compensate him for his losses.

"The suicide note is in my bag," Mr. Na calmly told the general manager. "I'm prepared not to go back."

Yinhua executives called the police. They helped arrange a deal under which Yinhua agreed to refund Mr. Na's membership fee and reimburse his travel expenses. Yinhua's deputy general manager, Li Jiang, confirmed Mr. Na's story but denies that the firm did anything wrong. "We provided the refund out of humanitarian considerations," he said.

The government is taking some steps to deal with unscrupulous brokers. In February it said it was drafting an insurance program, similar to the Securities Investor Protection Corp. in the U.S., that would restore funds to investors whose brokers go bankrupt. More often, however, the government pumps money into troubled brokerages instead of shutting them down.

China is also opening the door wider to foreign investors. Until mid-2003, only domestic investors could buy the yuan-denominated "A shares" traded in Shanghai and Shenzhen. Since then the government has permitted 26 foreign firms to invest more than $3.8 billion in A shares.

At closed-door meetings, regulators are telling foreign fund managers that China is a buy. "No country is growing as fast as us. Long-term, this market is solid," said Gui Minjie, a vice chairman of the regulatory commission, at one meeting in February, says a person who was there. Chinese regulators hope foreign investors will bring more expertise and stability to the market.

The China Securities Regulatory Commission was rattled by the January self-immolation at its Beijing headquarters. State-run media said nothing about it; a senior editor at a state-run financial newspaper says China's propaganda chiefs ordered the newspaper to keep the incident secret.

A police official said the man who set himself on fire is "fine," but a security guard says people who were there reported that his arms were charred and seared to his chest. The man's exact complaint couldn't be determined. A commission official says he appeared distraught at large stock-market losses.

Less than two weeks later, Ms. Cui, the former advertising executive, joined a more businesslike protest at the commission. The rich investors decided against carrying placards, worrying that it would be too provocative, but tried to march upstairs to the offices of top officials. Guards blocked their way, and the investors ended up delivering their complaints in the lobby. Some demanded that the government pour money into the market to prop it up.

Dressed in elegant boots and silk pants, Ms. Cui twisted an expensive scarf as she described in a later interview her life as a big-time stock investor. She says she got rich in the late 1990s by selling her advertising company, though she declines to give the sale price. After that, she traded full-time in the VIP room of a local securities firm.

Ms. Cui says her current holdings are worth $600,000 less than she has invested over the years. She has replaced her Mercedes-Benz with a Nissan and stopped traveling to Europe. She's afraid her favorite shopping mall will strip her of gold-card status because she might not meet the $2,400 spending minimum this year. Even her brokerage stopped sending her birthday cakes, she says.

So in late January, when another investor dropped by the VIP room and invited her to the protest, Ms. Cui responded, "Why not?"

"If I were the only one who lost money, I would blame my poor IQ or wrong decisions," she says. "But now everyone has lost money, so it's a problem with the market."


--Ellen Zhu and Cui Rong contributed to this article.

Write to James T. Areddy at james.areddy@wsj.com1 and Peter Wonacott at peter.wonacott@wsj.com2

URL for this article:
http://online.wsj.com/article/0,,SB111403057565812375,00.html

[rffrydr]

Seem like ancient history. What's changed? Not the economy.

Have you heard the one about the foreign investor?...
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