While many of China's 60 million stock investors got burned, President Jiang Zemin (
Jiang ignored calls for market-boosting measures after Chinese dollar-denominated stocks were the world's worst performers in July, with the B-share index falling 22 percent. His only public comments focused on global politics and the leadership succession.
"I wish the authorities would make up their mind about how they want to develop the market," said Lydia Wang, a Shanghai real-estate agent, who counts Class B shares Jinzhou Port Co and Shanghai Tyre & Rubber Co in her portfolio. "The market is so volatile, it's making me sick." Economists say the market could do with some sign from the government that it will step up public works spending, which has helped the economy maintain an 8 percent growth rate this year.
Relaxing limits on foreign investment, reducing taxes, and allowing only the best companies to sell shares would also help.
"My clients are looking for a very clear signal that China's leadership still want to stimulate the economy," said Joe Zhang, chief China strategist at UBS Warburg in Hong Kong. The markets could have done with "a very unambiguous signal from Beidaihe."
Jiang didn't give much of a signal at all.
The president, 75 and scheduled to step down as party leader in 2002 and president in 2003, said he went swimming each of the 11 days he was attending the annual Communist Party leaders meeting, a two hours' train ride from Beijing.
He did take the time to meet four US Senators at his villa, about 200m from the brownish waters of the Bohai Sea. Rather than discuss the economy, he expressed his concern about President George W. Bush's plans for a missile shield and defended the detention of US scholars.
He pushed the same points home in a New York Times interview sought by China. The closest he got to the economy in the interview was to say he told certain "backward industries" that had begged for protection: "You have to be brave enough to swim in the sea. You have to swim upstream." No pictures have yet appeared of Jiang swimming, a tradition started by late leader Mao Zedong in 1966, when he swam in the Yangtze River.
Behind the scenes at Beidaihe there may have been discussion of the stock market's woes.
The government helped engineer the stock market rally by raising taxes on the record US$810 billion Chinese people hold in bank saving deposits and by allowing local investors to buy dollar-denominated shares.
The US dollar-denominated Shanghai B-share index, which almost quadrupled in the year to June 30, fell 3.5 percent yesterday after rebounding last week. The local currency A share index dropped 0.2 percent today. It fell 12 percent in July, after rising 15 percent in the previous 12 months.
Leaders plan to help finance the country's pension system by funneling 10 percent of all state share sales into a social security fund.
With weakened domestic markets, the government will have to find other ways to raise capital in order to fund the system.
Morgan Stanley Dean Witter chief economist Andy Xie estimates China needs to raise US$50 billion annually from domestic share sales annually to satisfy the fund's needs and companies' capital requirements. Last year, China raised about US$18 billion.
Falling share prices are bound to damp consumer spending, which makes up 60 percent of China's economy. Morgan Stanley's Xie estimates the ``negative wealth effect'' of the equivalent of 4 percent of China's gross domestic product that evaporated in July will pare economic growth by around 0.2 percentage point this year.
The government is also relying on the stock market to allow its most profitable companies to raise funds. Last month's market slide may not bode well for 130 companies that announced 100 billion yuan (US$12 billion) in share sale plans this year, including PetroChina Co, China's biggest oil company, and China Unicom Ltd, its No. 2 cellphone operator.
What's more, China's stock market decline could blow a hole in China's budget this year if the government is forced to bail out banks saddled with bad loans made to investors who bought shares at inflated prices, according to Yiping Huang, chief China economist at Salomon Smith Barney in Hong Kong.
``Whenever you have a problem in the banking sector, the finance minister has to finance it,'' he said.
The slump in China stocks was partly caused by a clampdown on stock market investors buying shares with borrowed money. China's leaders may be worried the stock market needed to cool down. The average price of Shanghai B shares is 66 times last year's earnings per share, compared to 43 times for Shanghai local currency A shares and 16 times for Hang Seng index companies.
Class A shares, denominated in yuan, are reserved for domestic investors, while Class B shares may traded by both by locals and foreigners.
"The A-share market is still a bit overvalued, and the government seems quite happy for it to come down," said George Long, who manages the China Index Fund, which tracks B-shares.
"Probably the B-share market will trend downward for a while more." He encouraged his investors to withdraw their funds two months ago, when the fund's size peaked at US$120 million in assets.
Whatever leaders decided at their annual summer retreat in Beidahe, the results may not become public for months after the fact.
Last year, economic policy was discussed only at broad levels, with participants discussing China's 2001-2005 economic blueprint, formally unveiled this March.
At the top of their agenda this year was next year's party Congress, where a new leader will be chosen to replace Jiang as the party's general-secretary.
"The whole idea of the Beidaihe meeting is that leaders get away from the office and they have time to concentrate on strategic issues," said Salomon's Huang. "They probably won't look at any issues related to day-to-day business management." Jiang tried to make it clear he was very much engaged during his break.
"People think we are here for a vacation," he told the New York Times. "But actually, it's impossible to take a break, even for a single day."
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