With many of China's 60 million registered investors sharing Chen's sense of outrage, the pressure on the country's new stock cop is palpable. Shang Fulin, a little-known technocrat, landed in the hot seat last week when he was named chairman of the China Securities Regulatory Commission (CSRC). His challenge: to impose order on a stock market that a leading Chinese economist once described as worse than a casino (because "at least casinos have rules"). Shang arrives at a precarious juncture. Even as China's GDP has grown 8% annually, its market has sunk more than 40% since its June 2001 peak. Stock-rigging scandals and lax corporate disclosure have sapped investors' confidence, and Shang must restore their faith. To do so, he will have to fend off government officials who see the market as a vehicle to funnel investors' cash into profitless state-run companies. He will need formidable political skill, even braveryShang's predecessor received death threats when his market-oriented reforms drove stock prices down.
It's not only local punters whose money is riding on Shang's efforts. Thanks to China's commitments to the World Trade Organization, its stock market is slowly opening up to foreigners too. Overseas firms won permission in November to start forming joint-venture fund management companies, and others will begin underwriting Chinese companies listed on the country's two bourses, in Shanghai and Shenzhen. These foreigners will be looking to the CSRC's new chief to protect their investments before ponying up their highly desired capital.
But is Shang up to the task? Some observers are skeptical, given that he has no public record as a reformer with a commitment to greater openness. "We're worried he's simply a technocrat and not an advocate," says a senior executive at a multinational investment bank, "and that could affect the progress of reforms."
Shang's predecessor, Zhou Xiaochuan, was a committed reformer who took over the CSRC in 2000 and tried to give it teeth. (Last week he was rewarded with a promotion to lead the central bank). Nonetheless, investors have been duped in the past couple of years by a string of spectacular stock-market scandals. Consider Lu Liang, for example, who took control of a listed chicken breeder in 1999 and renamed it China Venture Capital. After raising an astounding $650 million from investors, he used 125 brokerage offices to manipulate his firm's shares. Under a pseudonym, he even wrote newspaper articles extolling the stock, which rose 370% before crashing in 2001. Lu bragged in an open letter that "the man who killed the bull market was once a common peasant." Last June, six of his cohorts went on trial, though no verdicts have yet been reached. Meanwhile, police are still hunting for Lu, who has gone into hiding.
Loudmouth crooks are just one of the CSRC's headaches. Its main problem is its failure to free itself from governmental meddling. One of the CSRC's key responsibilities is to determine which companies can list their stocks on the market, but these regulatory decisions are often muddied by political considerations. The CSRC would like to approve more private companies, which generate the bulk of China's new jobs, are growing fast and might thus be attractive to prospective investors. However, the CSRC remains part of the State Council, China's Cabinet, which insists that 75% of new listings must be state-run companiesmany of which are hopelessly inefficient and lousy investments.
One measure of Shang's success will be his ability to list more private companies, reversing this tradition of governmental favoritism. Likewise, Shang must also allow listed state companies to sell more of their shares to the public, giving regular investors greater influence over how those companies are run. However, making these changes happen will require political clout, says Joe Studwell, editor of the China Economic Quarterly, "and it seems Shang just doesn't have it."
Truculent bureaucrats aren't the only force arrayed against Shang. Ordinary Chinese who bought shares at the government's urging now fear that stock-market reforms will drive prices down even further. After all, they've seen how stocks plummet when government investigators target a company on suspicion of corruption. Some shareholder advocates say the CSRC's proposed reforms should actually be shelved because the policies will hurt the widows and orphans who spent their last fen on stocks. "The government sold shares to the people for far too much money, and it can't let the market die now," argues Yang Fan, an economist at the Chinese Academy of Social Sciences who has written extensively on the defense of small investors.
Chinese investors have long had a habit of relying on the government to prop up the market. Indeed, CSRC officials have been known in the past to summon brokers to meetings and "advise" them to buy stocks when the market dipped too far. Given this tradition of official intervention, investors have learned to base their buying decisions not on whether they think a company's profits will grow in the long term but on what they think the next governmental policy will be. Thus stocks tank every time the CSRC announces plans to let listed state enterprises sell more of their shares, and they soar whenever outraged investors persuade the CSRC to shelve such plans thereby limiting the oversupply of stock.
Shang Fulin will have to choose. Will he push ahead with stock-market reforms that might drive down prices, or will he delay these reforms even though they are urgently needed to protect investors? Back in Kunming, Chen Xuesong hasn't yet abandoned that fraying notion of the market as a road to happiness and hope. For now, he's letting his bets ride. "At least maybe I'll make back some of what I've lost."