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China's dice-roll on casino culture

Willy's Eye on China

CHINESE Premier Zhu Rongji has taken aggressive steps to open up and expand the stock market. Yet to succeed, the authorities must address widespread concerns that the bourses are little more than casinos.

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Officials and brokers expect a series of follow-ups to this week's announcement that mainlanders can buy and sell B shares, which were only available to foreigners.

For example, overseas institutions will soon be allowed to purchase yuan-denominated, for-mainlanders-only A shares; the A and B regimes will merge; and Zhu will further enlarge the cake by allowing domestic insurance and pension funds to get into the market.

There are expectations that after the country's accession to the World Trade Organization (WTO) and the opening of a Nasdaq-like second board in Shenzhen, the stock market, on which nearly 1,200 companies are listed, may double in size in a matter of years.

Some can look at others' cards

However, a lone but powerful voice has cast doubt on the general euphoria by fingering the emperor's new clothes. Wu Jinglian, an eminent economist with the State Council, dropped a bombshell earlier this month by saying that the bourses were like a casino, and a lousy one to boot.

"There are rules in casinos such as you can't look at other people's cards," said Wu, a one-time adviser to Zhu. "In our stock market, some people can take a peek at others' cards. And they get away with all sorts of tricks and chicanery."

Wu also queried the quality of the listed companies, saying that at 60 to 80 times, the price earning ratios of many popular stocks were unsustainable.

He warned it was dangerous for some officials to advocate further boosting the money supply to enlarge the bubble because, he said, "it may burst and the crash will be very serious."

Banks and others investigated

Wu's jeremiads were accompanied by a series of exposes in the Chinese media of phony brokers gouging gumin ("stocks-crazed people") -- and of institutions such as banks and state-owned enterprises (SOEs) breaking the law by using public funds and inside information to make a quick buck on the bourses.

For example, in the relatively backwater city of Lanzhou in northwest China, police are investigating 18 unregistered brokers for milking at least 865 investors of several hundreds of millions of yuan.

Then there is the shocking story in a recent issue of the financial journal Caijing, in which a well-known broker confessed to having raised 2 billion yuan from banks and other state units to "stir-fry" the market.

The Chinese stock market, capitalized at some 4.5 trillion yuan, rose more than 55 per cent last year. Yet largely because of the doomsday scenarios of Wu and other negative reports, it shed about 7 per cent in the first weeks of trading after the Lunar New Year. China's normally gung-ho gumin, estimated at over 50 million, are on tenterhooks.

Bring markets in line with global norms

Under Zhu's supervision, different departments have taken multi-pronged actions to try to restore confidence. Investigations are being launched into dozens of banks and government departments suspected of using state funds to speculate in the bourses. A number of unlicensed and badly run brokerages have been closed down.

In marathon press interviews, China Securities Regulatory Commission (CSRC) chairman Zhou Xiaochuan has reiterated Beijing's determination to crack down on insider trading and other forms of manipulation.

"We will promote the principle of corporate governance in line with China's actual conditions," Zhou said, adding that the market definitely was not a bubble.

Zhou, the son of a minister who was deemed a patron of President Jiang Zemin's, said a slew of laws and regulations was in the pipeline on areas including accounting and auditing practices, disclosure requirements and shareholder rights.

Perhaps not by coincidence, the CSRC announced last week the appointment of Laura Cha, the respected deputy chairman of Hong Kong's Securities and Futures Commission, as one of its vice-chairmen.

Cha, a US-trained lawyer who recently gave up her American citizenship, is the first non-mainlander to be appointed to a vice-ministerial post. She is also the daughter-in-law of a Hong Kong tycoon with close ties to late patriarch Deng Xiaoping.

It is understood that the CSRC and other financial units have approached a number of ethnic-Chinese professionals in Hong Kong and overseas to help bring the Chinese market into line with global norms.

Shifting debt burdens to investors

While salutary, these moves have left many questions unanswered. Foremost is the fact that the all-too-visible hand of the state still looms large.

After all, market listing - and quasi-privatization - is a principal way through which Zhu resolves the perennial problem of unwieldy SOEs.

As Wu put it: "In the eyes of some government officials and SOE leaders, the function of the stock market is to help enterprises raise cash and bail them out."

What Wu and other economists imply is that the state is in many instances shifting the burden from government banks -- which are laden with billions of yuan worth of SOE bad debts -- to domestic and foreign investors.

Moreover, the stock market -- and shareholders -- is the underwriter of China's social security net, a key to maintaining political stability post-WTO.

Zhu to offload more state-held shares

Zhu has plans to offload more than 1 trillion yuan of state-held shares in listed SOEs -- and much of the funds will be used to finance an ambitious unemployment, medical and old-age insurance program.

Particularly given the on-going plans to expand the market, it is in Beijing's interest to bring out the bull -- and to convince gumin, often through upbeat media commentaries and interviews by senior cadres, that the bubble won't be bursting just yet.

Equally important, the CSRC and other regulatory organs will have much more credibility if they cease to be adjuncts of the Communist party and state apparatus.

At the moment, top cadres including Zhu and Jiang have a say in which major SOEs will have listing priority, which patriotic overseas-Chinese professionals should be recruited by the CSRC and the banks -- and how much they should be paid.

A parallel can be drawn from the anti-corruption operation. The graft-busting mechanism will never work well because the highest anti-corruption organ -- the Central Commission for Disciplinary Inspection -- is a party unit that is under the Politburo's control.

The final decision to crack down on big-time stocks-related fraud also rests with the party leadership.

Moreover, the way the authorities have mobilized the official media to contain the damage of Wu's remarks smacks of old-style state interference rather than Western-style transparency.

Last week, government-run media and websites featured the pro-market views of five famous professors, who lambasted Wu for being too "superficial" and "emotional."

"If the stock market is a casino, are China's 58 million gumin gamblers -- and the 1,200 listed companies gambling tools?" they asked.

Earlier this week, Beijing gave verbal orders to selective media to refrain from running exposes about illegal and irresponsible brokers.

Such heavy-handed measures -- and expectations of the merger of the A and B markets as well as the influx of foreign funds -- helped engineer a slight market rally this week.

Yet until Beijing is really committed to letting market forces run the show, party and state fiats coupled with the gaming instincts of brokers and gumin may thwart one of Zhu's most ambitious reform initiatives.



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