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Bears On A Rampage In China

International Business: CHINA


On the trading floor of the Shanghai Securities Exchange, many traders spend their hours staring at the ceiling. These days, they haven't much else to do. Less than a year ago, the stretch of road outside the hulking greystone building housing the exchange was a mob scene of investors fighting for a chance to buy shares. Now, one is more likely to encounter Western backpackers checking into a nearby low-budget hotel.

Throughout China, the euphoric buying mood that once prevailed has turned cold sober. Trading in stocks is anemic. Investors in overseas bonds have taken a pounding. Dozens of futures exchanges have closed.

While markets worldwide have slumped this year, the drop in China has been especially severe. That's partially because of Vice-Premier Zhu Rongji's tight-money policies to cool off the overheated economy. Activity has nearly ceased on many exchanges, where corrupt traders have become the subject of a government crackdown. The turmoil is forcing Chinese officials to reassess their management of capital markets. "The central government had to issue very hard economic controls," says Shanghai Vice-Mayor Xu Kuangdi. "They are worried about a bubble."

The misery is not limited to China. In Hong Kong, the Hang Seng index, which hit a high of 12,201 in January, has floundered below 9,000 for weeks. Gone are the days when anything labeled a "China play" was bid up to dizzying prices. For instance, prices for Tianjin Bohai Chemical Industry Corp. have plunged 30% since they started trading in May.

The task of restoring order is made more urgent by the continuing crisis in the state sector. Companies that had counted on booming equity markets to buttress their finances now are lowering their sights. Citing the sluggish market, Shanghai Petrochemical Complex recently said it was indefinitely postponing its long-planned $25 million offering in Shanghai, and local officials have lowered their target for new capital to be raised this year by 65%, to about $230 million. Analysts predict Bei-

jing will have to slow the planned flotations of an additional 22 companies, ranging from railroads to airlines.

The downturn is sure to slow efforts to create new markets across China. Dozens of new commodity exchanges, which had been a cornerstone in the move toward market pricing of key goods, already have been plagued by scandal. Investigators have found traders siphoning deposits to Hong Kong and rigging computers to show phony data. In late June, investigators raided Shanghai traders suspected of losing hundreds of millions of dollars speculating on strategic metals overseas. Authorities also have closed the Beijing Petroleum Exchange and banned trading in futures of everything from sugar to steel.

SILVER LINING. So far, high-profile swindles have not hit the stock markets. But there have been enough shenanigans to make investors wary. Public companies have often been more generous to Chinese shareowners than to foreigners. "The mentality is to serve the interests of local investors," charges Brian Leung, a Hong Kong-based analyst at W.I. Carr (Far East) Ltd.

The silver lining is that Chinese investors haven't become so jaded that they distrust all new markets. While the market for China's overseas bonds looks bleak, domestic bonds are thriving. In the past, few investors would touch them because they were illiquid and paid about half the rate of inflation. But now that the government has made it easier to trade bonds on secondary markets and has pegged yields to inflation, it has placed nearly $11 billion worth--triple last year's level--with minimal coercion.

For the right deal, money managers say, there still is interest among foreign investors. Billions have been amassed in direct investment funds by such companies as GE Capital Corp. and Goldman Sachs. American Standard Inc., for example, raised $83 million in May from foreign institutions for a Chinese joint venture to make bathroom fittings. "The only deals that make sense are long-term ones that are negotiated privately," says Keith W. Abell, managing partner of Travelers' Greenwich Street Capital Partners Inc. in Hong Kong.

A key test for China stocks will come later this year when some of the soundest prospects, including China Southern Airlines and Shandong Huaneng Pmwer Development Co., attempt to list in New York. Meanwhile, Chinese authorities are trying to figure out ways to restore their own markets. Half of China's state enterprises are sinking further into debt, estimated to total $20 billion. Finding new capital is urgent for Beijing, which has stepped up subsidies to avert bankruptcies and layoffs.

CONFIDENCE BUILDING. Market officials say that the crash will help them move faster on setting up a regulatory framework for stocks and commodities. In futures, where there are some 500 underground trading houses, the government wants to require that all trading be done at officially sanctioned exchanges with minimum capital requirements, at least 20 full-time brokers, and adequate telecommunications facilities. The government also is stepping up work on laws regulating trading.

But rebuilding confidence will take time. After playing the market, Shanghai factory worker Xu Kangyi lost more than $2,300--about four months' pay. Xu, 46, has been forced to sell at a loss just to get by. "It's like slashing the meat off my bones," he says bitterly. Regulators will have their work cut out convincing him that the market is safe.


EQUITIES The Shanghai market is down two-thirds this year, and trading volume has fallen 75%. The Shenzhen market is also in the doldrums.

COMMODITIES The Beijing Petroleum Exchange is closed, and futures trading is banned in everything from sugar to steel. Investigators are cracking down on corruption.

OVERSEAS LISTINGS Foreign investors have soured on Chinese "red chips," forcing state-run companies to rethink their financing plans.

DATA: BUSINESS WEEKPete Engardio and Dave Lindorff in Hong Kong, with William J. Holstein in Shanghai

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