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    China Business
     May 30, 2007
Page 1 of 2
SUN WUKONG
Politicizing China's stock market bubble
By Wu Zhong, China Editor

HONG KONG - In China, nearly everything can be easily politicized. The stock markets are no exception. As the stock-market bubble continues to inflate, some people are now tempted to make political interpretations.

According to one theory, what keeps the retail investors and speculators bullish is their belief that the government won't take harsh measures to prick the bubble before or shortly after the 17th



National Congress of the Chinese Communist Party (CCP) in the autumn, because Beijing wants to see people smiling during the all-important meeting of the party elite. On the other hand, a market crash would mean a big loss of face for the party, and in that case heads would roll, as some officials would be held responsible.

It happens that Executive Vice Premier Huang Ju is in hospital suffering from pancreatic cancer, and he was rumored earlier to be dead. Hence his job of overseeing the country's financial and economic affairs, including the stock markets, has been taken over by Premier Wen Jiabao personally.

So according to that theory, a stock-market bubble burst shortly before the 17th Party Congress could be used as an excuse by Wen's political enemies to attack the premier at the meeting, which could jeopardize his position. Even a bubble bursting shortly after the meeting could be a big source of embarrassment for Wen.

While those who subscribe to this theory in general may read too much into the stock-market bubble by relating it to power struggles within the CCP, they do make a good point that the Chinese government does not want to see a market crash either before or after the 17th Party Congress. In this regard, it behaves like other governments in the world: trying to let the market bubble deflate gradually to avoid a social and economic jolt. This is despite the fact that a market bubble is often, if not always, beyond government control.

This may explain why the Chinese government, like the Japanese government in the late 1980s and the Hong Kong government in 1997, still refrains from taking "heavy-handed" measures to deal with the stock bubble.

In fact, opinion among Chinese officials may be split on whether the current stock markets are too speculative.

It was Cheng Siwei, a vice chairman of the Standing Committee of the National People's Congress, who in January was the first to talk about "the formation of a bubble" in the stock markets due to speculation.

However, two weeks ago, Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said the assertion that "all people are speculating in stocks" was an exaggeration by the media. Although the number of investor accounts exceeded 90 million, some 30 million were in fact inactive or "dead" accounts. And the active 60 million-plus accounts were in fact held by 30 million investors, as an active investor would normally open accounts in both the Shanghai and Shenzhen bourses. Hence active traders in stocks would only be about 30 million.

As if to echo Shang's view, Wang Zhongming, director of the research center under the state-owned Assets Supervision and Administration Commission, publicly commented around the same time that "all people speculating in stocks is a hugely good thing". The market economy is a free economy under supervision, so it is good, according to Wang, for more and more people to participate in the capital market, taking their savings out of the banking system to reduce banks' excessive liquidity.

Last Friday, Xiang Huaicheng, a former finance minister who is now chairman of the National Council for the Social Security Fund, said it was hard to know whether there is a bubble in the stock markets. Stock markets are like beer, so it is acceptable to have some bubbles, according to him.

Whether these officials' views reflect what Wen is thinking, no one knows. But when Wen addressed the opening of the annual meeting of the African Development Bank in Shanghai on May 16, he did not appear worried about the stock markets at all. Instead, he said his government was confident about pursuing the steady and stable development of China's capital market.

Analysts say that Wen, speaking so confidently, must have a good plan in mind for dealing with the current situation facing the stock markets. So what is Wen's plan?

It is unlikely to focus on using monetary-policy instruments. The central bank has repeatedly raised commercial banks' deposit-reserve ratio to tighten credit, which has been ineffective at cooling down the stock markets. Nor has the slight interest-rate hike two weeks ago deterred investors. Chinese citizens still hold savings deposits of more than 17 trillion yuan (more than US$2.2 trillion) in banks, and such moderate monetary-policy measures could hardly affect their enthusiasm for trading in shares.

It is more likely that Wen's plan, if indeed he has one, will focus on the increased supply of shares on the Shanghai and Shenzhen bourses to meet growing demand. From the market point of view, the current bubble has largely formed as a result of short supply.

Let statistics speak here. On April 22, there were 1,436 A-share companies listed on the stock exchanges in Shanghai and Shenzhen, with capitalization totaling 17.46 trillion yuan. However, of the total capitalization, only 5.66 trillion yuan, or 32.4%, came from tradable shares, while the rest, nearly 70%, came from state 

Continued 1 2 


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