China economy soars as stocks sag

By Tim Johnson
Knight Ridder News Service

BEIJING — China's bearish stock markets are on a sharply divergent path from the booming economy, leaving investors embittered and peevish about their losses.

"A lot of us have been cheated," retired factory worker Ji Lanmei said, emerging from a brokerage office in the capital.

The nation's Shanghai and Shenzhen stock markets appear unable to pull out of a four-year slump, hobbled by corporate misbehavior and a lack of reported profits. The stock decline has occurred despite the nation's sizzling, sustained economic growth. China's economy soared 9.5 percent last year and is expected to grow 8 percent in 2005.

For shareholders, many of them urban retirees, an unremitting bear market underscores the need for an overhaul of the securities system. They complain of listed companies that ignore shareholders, issue scanty financial information and retain a majority of ownership in nontradable shares controlled by state entities.

"We all wish the government would do something," said Shi Zhonghua, an investment analyst at the Shanghai office of Everbright Securities.

Even state-run media have jumped on the bandwagon, calling on the government to speed reforms of the capital markets and the 1,387 companies listed there.

"The country's stock markets are plagued by many complex and interlocking problems ... corporate scandals, malpractice by brokerage firms and loose regulations by the securities' watchdog," the China Daily newspaper said in an editorial Monday.

The Shanghai Composite Index shrank 15 percent last year, ranking as the world's worst-performing market. The index has slid about 40 percent since 2001. The decline of the Shenzhen exchange has been similar.

At brokerage houses in Beijing and Shanghai, small investors voiced frustration at feeling "trapped" in a falling market, with no sign of a turnaround.

"People are very angry. We are at our wits' end," said Wang Wenyu, a retiree who spent 25 years in the People's Liberation Army. "There could be an explosion."

Speaking outside a branch of the Huaxia brokerage house, Wang's vociferous complaints drew a knot of shareholders voicing similar complaints.

"The government knows that some of these listed companies are making false statements," said one man, before turning heel.

In fact, regulators are taking action. Since 1996, the China Securities Regulatory Commission has sanctioned 272 listed companies for violations, including providing false information, said Wan Kai, a senior analyst at the Beijing office of China Securities, a brokerage.

The markets' dismal performance also has political dimensions.

Amid a stock boom in the mid-1990s, Communist Party newspapers urged citizens to buy shares. Some 70 million open accounts now exist, although individual shareholders may number only 40 million to 50 million. Now, as investors watch their losses mount, party leaders worry that it could ignite unrest.

Premier Wen Jiabao recently pledged to reform the capital markets.

"Although I seldom speak on the stock market, I am watching it every day," Wen said. He said regulators would seek to improve the quality of listed firms, enhance transparency, protect the interests of small shareholders and crack down on speculation.

One factor at the root of the stagnant markets is that many companies retain significant ownership in nontradable shares. Today, about two-thirds of the markets' $460 billion in capital is tied up in those shares, leaving corporate managers unresponsive to small shareholders.

Rumors that some listed companies might dump some of those shares in a massive sell-off, designed to milk the markets of more money, sparked recent declines.

Amid dismal returns, some investors have moved money into real estate, which has offered double-digit returns in major cities.

Economists say China could use healthy capital markets to employ some of the $1.4 trillion in private savings at its state-owned banks, which often squander money in loans to poorly performing enterprises. As China tries to build a larger entrepreneurial class, it will need to provide private companies with sources of capital.

Fewer than 10 percent of listed companies have private roots, and even some of them are controlled by government entities.