Wed, Feb 21, 2001 page8

• Be wary of China's stock markets

  • By Hsu Tung-ming 許東明
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  Urban Soap operas have gradually become some of the major TV shows in China. The phenomenon illustrates not only the gaping difference between inland and city life in China, but the great importance attached to commercial values in this money-driven society that is having its overall values hollowed out. In these soap operas, most of the protagonists are businessmen, and thus stock market speculation forms an indispensable element of the plots.

  China's media dubs stock market investments "stir-frying stocks" (炒股票), which does make sense since "stir-frying" smacks of artificial speculation. Since the lunar new year holiday, stock speculation once again has become a hot topic in the media. This can be attributed to the tumble the stock markets in Shenzhen (深圳) and Shanghai (上海) took following the holiday, as well as a storm triggered by the "gambling theory" on Chinese stock markets put forth by Chinese economic heavyweight Wu Jinglian (吳敬漣). The official Xinhua News Agency (新華社) even released an editorial in a bid to persuade investors to slow down and make long-term observations.

  In fact, when discussing his theory on a China Central Television show, Wu -- widely known as "Market Wu" in China -- bluntly pointed out critical problems existing in Chinese stock markets. Wu said, "Foreigners say Chinese stock markets take after casinos in that they are not stringently regulated. Casinos actually do have regulations, such as prohibitions against looking at other players' cards. In our `gambling house,' however, some can peep at others' cards, as well as cheat or defraud. The art of acting as a banker in casinos or manipulating stock prices has been developed to the state of perfection."

  By virtue of his strong call for the establishment of Chinese stock markets 20 years ago, Wu has a great say about China's economy. Hence his statement touched off heated discussions -- both pro and con -- in the media.

  Despite their 10-year history, the Chinese stock markets were not valued around the world until China's economic boom in recent years. Hidden behind this glorious appearance, however, is structural corruption. One factor is that companies usually fabricate financial statements in order to go public. This way the companies are able to collect capital and then invest in other fields. This was demonstrated by the Zheng Baiwen (鄭百文) case which erupted last year.

  Originally in charge of state-run businesses, Zheng took his company public by making false financial statements and then he created the illusion of a profitable company by presenting fraudulent sales records and boasting of its behind-the-scenes political capital. He raised funds from various investors and hollowed out his company's assets to re-invest in other fields. The company's stocks finally plummeted due to its inability to repay 2.5 billion yuan in debts owed to banks.

  This, however, was not the only incident to take Chinese financial markets by surprise last year. A Chinese financial magazine analyzed the operational modes of securities investment trust corporations and released a shocking report entitled The Black Curtain of Funds. According to the report, these companies create fake turnovers by selling stocks to themselves, or to one another at times and prices negotiated beforehand. They are thus able to control stock markets.

  Two fundamental problems exist in China's financial markets: one, they are deeply affected by political influence and two, their operations are far from mature. The so-called political influence does not mean government intervention; it means the burgeoning interest groups formed by politician-business cronies following the reforms initiated by the late Deng Xiaoping (鄧小平).

  These groups benefit from new government controls, their monopolies on the administration, and the residual power left from the planned economy.

  It should be mentioned that individual Chinese investors do not take company sales into consideration since it is widely known that many financial statements are not authentic. In addition, profitable listed companies do not necessarily have soaring stock prices.

  It turns out that the new interest groups have even more rallying power than business achievements. As a result, individual investors easily fall into traps since the capital flow controlled by these groups in the stock markets is not known to the public.

  Investors now share the same sinking feeling that making money in stock markets is not as easy as it looks. Although regulations and managing rules have been set, the operations of these groups are still enmeshed in the net of traditional "guanxi" (關係, personal connections). There is, therefore, still no effective way to ban manipulation.

  In light of the confusing state of Taiwan's stock markets, some Taiwanese businessmen may consider moving to China's stock markets. Given that the those markets are a minefield -- investors should indeed think twice.

  Hsu Tung-ming is a freelance writer based in Beijing.

  Translated by Jackie Lin and Francis Huang
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