Chinese stock speculators 'stir fry' an uncertain boom Crude securities trading sweeps nation, though risk is that rTC of a gambling casino

July 08, 1993|By Robert Benjamin | Robert Benjamin,Beijing Bureau

CHANGSHA, China -- Hope springs eternal in the Hunan Securities Co.'s VIP room. So does a speculative fever that many fear is getting dangerously out of control.

In the coastal cities of Shanghai and Shenzhen, China's two legal stock markets continue their slide of the last few months. But hundreds of miles inland -- in this small room on the eighth floor of a run-down guest house in Hunan province's capital -- the investors are certain the downturn is only a brief aberration.

"Stocks are like the weather, always changing," says Xie Shu Lei.

"When it's been raining for a long time, fine weather is bound to come soon."

Mr. Xie, 50, is among a dozen high-rollers who daily cram into the seedy hotel room to study a desktop computer monitor displaying the real-time prices of 63 stocks on the Shanghai and Shenzhen exchanges. The big traders laze about, fill the room with cigarette smoke and use its single phone to "chaogu," or "stir fry," their stocks.

To attain VIP status, each acquired stocks worth about $50,000, an inconceivable bankroll for most Chinese. Recently, many have lost about 30 percent of their money. But most are convinced that as long as they don't sell, they haven't really lost anything.

And whatever happens, all readily agree that stock trading beats working for someone else. "In public, we still must talk socialism," laughs one of the VIPs, Dr. Li Bo Wei, 40, an eye surgeon turned full-time trader. "But in private, we all talk capitalism."

Remarkable only two years ago, such scenes are commonplace throughout China these days -- not just in booming coastal cities deeply influenced by the West, but also in much less developed, previously isolated areas such as Hunan province.

Throughout China, speculative financial pursuits, both legal and illegal, have spiraled out of control over the last year and a half in response to paramount leader Deng Xiaoping's call for the rapid development of capitalist-style markets.

So much Chinese money is flowing into stock trading, real estate, international currency deals, overseas accounts and unregulated lending for innumerable schemes that the Chinese banking system faces a serious cash shortage.

The nationwide financial crisis bodes increasing political turmoil. Officials are buying farmers' crops with worthless IOUs and trying to extract from them exorbitant taxes and fees, provoking small-scale peasant riots in several provinces. Inflation now exceeds 20 percent a year in some cities, risking urban turmoil.

Street stock markets

In virtually all Chinese cities, street stock markets have blossomed to facilitate a growing illegal trade in unregistered stocks. In Chengdu, the capital of Sichuan province, officials even let the black marketeers use a stadium for their exchange.

Authorities broke up a pyramid scheme last month that took as many as 100,000 Chinese investors for more than $175 million. Scores of high officials are implicated in the scam, which offered bonds backed by few assets but paying 24 percent interest.

In another recent fraud, a state bank disclosed that 200 false letters of credit worth more than $10 billion had been issued in the name of one of its rural branches. Such letters, similar to cashiers' checks, are used to pay for imports.

Having ignored months of warnings that a dangerous "bubble economy" is in the making -- a bubble that could soon burst -- central government authorities last week finally took action.

The head of China's central bank was removed from his post and replaced by China's first vice premier and economic czar, Zhu Rongji, who is now striking a higher profile than his chief rival, ailing Premier Li Peng. Mr. Zhu has summoned provincial leaders to Beijing this week to launch a new austerity drive.

The provincial leaders -- some of whom have been in the forefront of the speculation craze -- now are being asked to accept a 20 percent cut in government spending, a call on loans diverted to speculation, limits on new stock issues, interest rate increases and forcing workers to buy unsold government bonds.

China's last such austerity campaign in 1988 virtually shut down economic growth in much of the country and set the stage for the 1989 Tiananmen Square protests.

Ignored restraint

At the same time, that call for financial restraint was largely ignored by China's rich southeastern coastal provinces, enabling them to get even farther ahead of other Chinese regions.

Five years later, Beijing's political control over China's provinces is even weaker. And with the increased liberalization of China's economy, many more individuals in all parts of the country have moved beyond the state's financial control.

Hunan province, for example, shows how widely the speculative fever has spread. A one-time bastion of Maoism now desperate to catch up with China's booming coastal provinces, Hunan already has as many as 100,000 people legally playing the Shenzhen and Shanghai markets, says Luo Huixiong, general manager of the Hunan Securities Co.

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