China Takes a Broom to the Bourses

In May, 2000, Li Pulin was looking for a place to invest his life's savings. Like many naive Chinese investors, the 64-year-old retired engineer relied for information on TV reports and the state-controlled securities press. His stock pick was Guangxia (Yingchuan) Industry Co., a biochemical company and star of the Shenzhen bourse. News reports touted the stock, and Guangxia's quarterly reports pictured top Chinese leaders, including President Jiang Zemin, shaking executives' hands. By December, 2000, the company's shares had hit a peak of $4.56. Li should have sold. In August, trading in Guangxia shares was suspended after Caijing, the crusading finance magazine, reported that the company had inflated its export figures. Guangxia has since reported a $2.35 million loss for the first half of 2001. Its share price plunged after trading in the stock resumed Sept. 10. By Sept. 19, it had hit $1.79.

It seemed at first that investors such as Li had to suffer their losses silently. For while the China Securities Regulatory Commission referred the case to the Public Security Bureau for prosecution and two Guangxia officials were arrested, there seemed no recourse for small investors. China's Communist Party-controlled courts, after all, were highly politicized and unlikely to offer any relief. "If Jiang Zemin wasn't in these reports, we never would have believed in the company so much," lamented 46-year-old Wang Lushi, another Guangxia shareholder.

Not so fast. In August, reports appeared quoting CSRC Vice-Chairman Gao Xiqing urging minority shareholders to take companies to court for ignoring their interests. Soon after, Li and Wang answered an ad from the Shanghai-based Allbright Law Office soliciting shareholders to join a suit against Guangxia.

Welcome to the latest Chinese government campaign: shareholder rights. The CSRC has been trying since 1998 to get more power to police the markets. Suddenly, the rest of the government has made that a priority. "The stock market has been wasting money by giving it to bad companies. That has been slowing down economic growth," says Andy Xie, an economist with Morgan Stanley. Clean markets are essential if China is to achieve its goal of weaning state companies off bank lending, channeling savings into productive sectors, and spreading prosperity. China's Shanghai and Shenzhen bourses, with $600 billion in capitalization, are now Asia's largest after Tokyo. "China's markets are getting bigger and bigger, and so are the problems," frets a CSRC official.

There's a lot to do. When China opened its stock markets a decade ago, authorities saw them as a money machine--a sure way to sell off problem state companies. They let intermediaries manipulate prices. Executives and local officials stole corporate funds. Even so, the government talked the market up when prices fell. Now word has come from on high that this has to change. In July, Cheng Siwei, vice-chairman of the standing committee of the National People's Congress in Beijing, criticized the CSRC for not doing its job. That was the agency's cue. Since then, it has been speaking out widely on shareholder rights and urging investors to assert themselves.

HIGH HURDLES. The CSRC, however, has limited powers. It can investigate securities violations and levy fines of up to $72,000. It can also refer suspicions of criminal activity to the police for further investigation. But securities fraud isn't a priority for the courts. Civil suits involving groups of shareholders face huge political and jurisdictional hurdles. Courts balk at cases against companies with government shareholders. And plaintiffs can only sue where they are legal residents or where the company is based.

Thus, a court in Wuxi has accepted the Guangxia case. But Wang and Li are residents of Shanghai, whose court hasn't done so. Without a suit to join, their chance of getting restitution is slim. "Protecting minority shareholders' interests is just a slogan," Li complains. For Beijing's sake, he'd better be wrong. The government's hopes for its markets will never be realized if the bourses remain a place to shake down investors.

By Alysha Webb in Shanghai

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