Stock Market Frenzy in China

August 14, 1992

The spectacle of nearly one million Chinese clamoring to invest their money in the Shenzen stock market -- and creating the largest civil disturbance since the 1989 Tiananmen Square protests -- is the clearest sign that China's policy of "socialism with Chinese characteristics" is falling apart. It is new evidence that the capitalist experiment started in southeastern China 15 years ago is poised to overwhelm the country.

When Deng Xiaoping imposed reforms to introduce market forces into China's stagnating economy in the late 1970s, he created a tremendous spurt of economic growth, particularly in south China. Millions of peasants suddenly accumulated money. They invested some capital in their farms and other small enterprises, but economists estimate up to $183 billion has been languishing in low-yielding government savings accounts.

Lack of investment opportunities in China has resulted in a colossal amount of pent-up demand. Since creating the Shenzen and Shanghai exchanges 18 months ago, only about three dozen of China's 900,000 companies have been listed. Demand for these shares is fierce. Stories abound that some investors have already realized ten-fold gains. Large numbers of Chinese have been swept up in the stock market hysteria. Classes on investing are oversubscribed. Any book with the words "stock market" in the title is an instant best seller.

In Shenzen, people waited two days for the chance to purchase applications that let them buy shares in 14 new companies to be listed later this year. The demand overwhelmed the supply. Many of the would-be investors believed party officials hoarded applications for themselves. Nearly 50,000 protested. The peaceful protest turned violent, and the mob ended up breaking shop windows. Club-wielding police eventually quelled the frenzy of disappointed investors.

This free-for-all atmosphere sends shudders through the ranks of the party officials in Beijing who want to continue their tight control over the economy. However, unfettered market forces are hard to control. A renegade exchange opened on Hainan Island in March. Officials shut it down in April, but the market reopened in May. Unsanctioned markets may open in Canton and Xiamen, two other southern Chinese cities.

Deng Xiaoping would like to replicate the example of south China throughout the country, but hard-liners correctly fear that spreading this bold economic reform nationwide will weaken the power of the Communist party. In the past reformers believed that as long as Mr. Deng was alive, the economic reforms would continue. However, based on what happened in Shenzen, the newly prosperous Chinese -- along with the tens of millions aspiring to become wealthy -- just may force the government to continue the reforms long after the aging leader is gone.

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