With the Beijing Olympics only two weeks away, human rights activists are increasingly protesting China’s human rights record. A less well known story, however, is the turmoil currently facing China’s stock market.
Sujia Gong, an expert on China, discussed the recent problems faced by the Chinese stock and its impact on China’s economy.
The problem with China’s stock market, says Gong, stems from its very beginning in the early 1990s. Its establishment was originally designed to suit a socialist society running on a capitalist economy.
“The leaders of the Chinese Communist Party [CCP] did not want to lose control of economy,” said Gong. “Therefore when they put a state-owned company on [the] stock market, they had to own a large majority [of] shares.”
A typical practice used by the Chinese authorities was to withhold over 90 percent of the shares of a single company while letting the remaining 10 percent trade on the market. The stock was then divided into two categories: exchangeable and non-exchangeable. The exchangeable stock is sold at fair market value while non-exchangeable stocks disappeared into the hands of the Chinese regime.
“In the case [of Chinese stocks], even if you grab all the available shares you still don’t have control of the company because the government holds the majority,” said Gong.
“Basically it means that if I put all 100 percent of the stock in the market, each share would be sold for $1,” said Gong. “But [in China] there is only 10 percent [in the market] so each share now costs $10 instead.”
The lack of available stocks has caused prices to bubble, said Gong, who pointed out that in recent years, companies under the orders of the Chinese regime started releasing the shares that were previously withheld after demand for the available share soared. Shareholders who had paid for shares at the price set when only 10 percent of the stock was available were forced to pay more for the newly released shares above the market price.
Gong lists China Petroleum and Chemical Corporation as a prime example of companies profiting off of newly released shares. In 2005, the company’s shares were valued at 48 yuan per share. However, after releasing more shares into the market, the company’s capital more than doubled.
“When the government owns 90 percent of the shares, the ordinary shareholders can get it [the shares] for an extremely low price, sometimes as low as 0.1 yuan. Now each share is 10 to 15 yuan,” said Gong. “When they [the government] put in more stock they can collect a lot of money from the market, and from the people’s pocket.”
The rapid increase in stock prices has caused a downturn in the number of Chinese investors. In a survey conducted by “People’s Daily,” a state-run newspaper, shareholders were asked the state of their investments. The response was overwhelmingly negative with 92 percent of the respondents claiming a net loss in their stocks while 3 percent claimed to have broken even. Only 4 percent of all shareholders reported a net gain.
In China, there are around 100 million stock investors. Last year, over 5 trillion yuan in value was reportedly lost in the market, averaging over 50,000 yuan, or $7,000, per investor, which is the equivalent of three years worth of income for the average Chinese.
“Last year a lot of people put money in the stock market,” said Gong. “They borrowed money, sold their house and car, and borrowed from their friends in order to invest in the stock market. And now, it’s gone. They lost a lot of money and can’t afford to pay it back anymore.”
To remedy the problems faced by China’s stock market, the government has issued policies to stimulate the market, said Gong. However, the scale of the amount of money poured into the stocks by the Chinese regime pales in comparison with the amount already lost.
“The Chinese government feels that they have to boost the stock index to show people that they’re prosperous,” said Gong. “The problem is that they don’t have the money required to do that. The only thing they can do is to issue policies.”
Stabilizing the Chinese economy has increasingly become the top priority for the Chinese regime, especially with the Beijing Olympics only two weeks away.
“The Chinese government wants to demonstrate to whole world that their economy is very good,” said Gong. “The Chinese people know that government cares and will try to save face. The government will put money in stock market right before games to get money.”
Currently, the Chinese economy is held up by an influx of foreign cash, especially after snagging the rights to host the 2008 Olympics. Investments in China by foreign companies have caused the Chinese yuan to appreciate in value at a rate of over 10 percent a year. However, it acts as a double-edged sword. On the one hand, foreign investment is allowing the Chinese economy to survive while on the other hand, an appreciating yuan is causing China to lose its competitive edge in trade.
Exports take up the bulk of the economy in China, said Gong. When the yuan appreciates, products become increasingly expensive to produce. In Dongguan City, Guanzhou Province, over 10,000 factories have closed down due to increased production prices.
“This is why I’m very pessimistic when it comes to the Chinese stock market,” said Gong.
In a conference in France, China’s Minister of Commerce Bo Xilai mentioned that it takes over 800 million pairs of shoes and T-shirts to purchase a single Boeing aircraft.
“What does it tell you? The margins [on] products made in China products is very, very small,” said Gong. “When the yuan appreciates, China loses money. This is why a lot of factories are closing. Even in Zhejiang province, which is very close to Shanghai, factories are starting to close. You can see when the yuan appreciate, China loses its competition capability.”
A collapse of China’s economy will cause a detrimental blow to the Chinese government’s control on society, said Gong. Already, disgruntled investors are protesting unfair treatments in the stock markets on an increasingly large scale, especially online.
