P.S. Crosby



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January, 1994

Volatile And Unregulated,
China's Illegal Stock Exchanges
Are Giving Investors The Rides Of Their Lives

By Peter S. Crosby

CHENGDU. Sichuan steel-pipe maker Gong Yi Co. made a bold proclamation last summer. It announced the imminent listing of its shares on the Shanghai Stock Exchange. China's State Securities Commission (CSSC), which authorizes all stocks, was sure to give its approval. Investor reaction was swift. Prices of vouchers entitling holders to shares in the company soared on makeshift stock markets around the province.

The trading was illegal, but speculators were riding high. By mid-July, the announcement turned out to he hype: Permission had been denied. Prices of the vouchers plunged 50 percent in a single day. Riots ensued, particularly in Chengdu, the provincial capital. A dozen or more people were injured. Investors' life savings were wiped out.

Welcome to stock trading - provincial style.

Chengdu's unauthorized stock exchange, like others in China {Xian, Wuhan and Changsha also reportedly have bustling mini-exchanges), is wild and unregulated. Trading activity cooled somewhat last July after Chinese Vice-Premier Zhu Rongji imposed what proved to be a temporary "austerity" program. Chinese officials even claim they shut down these unauthorized markets. But Chengdu officials deny their market was ever closed.

From a peak of around 10,000 traders, the Chengdu market now draws about 2,000 to 3,000 participants daily. Overall, share prices are down 10 percent to 30 percent since last summer. Some investors, particularly those who bought at highs, are disillusioned. A popular pun reflects their discontent: The market's old location at Hongmiaozi Street was said to mean "red hot and sizzling," but its current location outside Chengdu's North Stadium rhymes with: "You wash here; you lose."

One Sichuanese speculator, who calls himself Panda, remains addicted to the frenzy. He quit his job at a computer wholesaler recently TO play the market full-lime. At 28, Panda, who carries a pager and wears an oversized money pouch over his silk shirt, exudes the arrogance of someone making easy money.

Each morning at 7, he goes to the stadium - local officials relocated the exchange last April to this new site because roving traders had outgrown the previous narrow street location. There, lines of nervous speculators circulate past clumps of sellers, who brandish plastic folders of stock vouchers, coupons and options certificates, while muttering price and market information.

Printed by companies as employee incentives or in lieu of salaries and bonuses, these "share reservations" originally are offered at deep discounts - if paid for at all. They also make it easier for companies' initial-public-offering bids to move more quickly from provincial authorities to the CSSC. While applications are pending for two to three months, these surrogates trade on the street markets as if they were real shares - they aren't.

Once a stock is approved by the CSSC, certificates are available to bearers of the vouchers and coupons. A brisk market then develops while the offering company registers all its shares by computer in preparation for listing on the Shanghai or Shenzhen exchange.

Market fever is palpable in Chengdu. Spectators swarm around routine transactions as though witnessing a miracle. Most trades are paid for in cash. Bills are held up to the sun or a streetlight to check authenticity. Panda bought 100 shares of Brilliant Development Corp. in this atmosphere, paying over $4,000 in cash out of his pouch.

Other investors brandish publications as advertisements for their holdings. Others brazenly hang hand-scribbled signs on tables, walls and trees. But being identified here is still risky. Cameras cause panic. Most investors still use fake identity cards to disguise real ownership.

Many of the securities for sale come from real estate developers. Lust summer's hot picks included Shou Du Mansions Co. and Beihai International Economic Business Development Center Co.. Infrastructure stocks such as Pan Zhi Hua Steel Plate Materials Holding Co. and E Mei Jin Din Holding Co. also sold well. And higher-tech ventures such as Yada Pharmaceuticale [sic] and Chengdu Liang Ju Ren Ju Holding Co., a precision measuring-tool company, were touted as long-term plays.

While Panda had the savvy to sell his Brilliant Development shares two weeks after purchase, reaping a 28 percent profit, others have lost their shirts. In June, for example, speculators rushed to buy United Investment Corp.'s Ying Ka (Eagle Card). The stock granted buyers "a piece of America" - a tiny piece of a California ranch.

Investors thought it was a safe bet. Ying Ka was properly registered and approved. A letter from March Fong Eu, California's Secretary of State, stated that the corporation was real. They could even see pictures of the property. Lines formed, and the stock soared to over $100. But this flight of cowboy fancy soon crash landed. Today shares of Ying Ka don't trade at all.

In this illicit market - essentially a world-of-mouth bazaar - terrible rumors also abound: suicides, government crackdowns, and Deng Xiaoping's death. But Panda remains calm. He continues to buy because prices have fallen so much.

And Beijing's sporadic attempts to slow speculation? Panda isn't worried. He thinks market development is so far along mat there is no turning back. The future of the Shanghai and Shenzhen stock indices depends on investments from within China. And as Panda puts it: no speculation, no investment.

He may be right. Beijing recently began considering a new securities law that would expand China's fledgling equities markets by opening regional exchanges for provincial companies. Officials are beginning to see that two national exchanges just aren't enough to keep up with the demands of rapid economic growth.

Self-interest, though, may be the ultimate safeguard. Company managers and local officials are making a bundle from insider information and access to stocks. Regulations will lake years to legislate and even longer to enforce.

"Beijing may want [the speculation] to stop," says Panda, "but provincial officials will protect it well."

Their incomes, after all, are at stake.

Mr. Crosby is a free-lance writer and photographer based in Tokyo.