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China Plays the Market

With the Chinese stock market in turmoil earlier this month, Orville Schell, Arthur Ross Director of the Center on U.S.-China Relations, wrote about the dramatic crash for The Guardian: “Why China’s Stock Market Bubble Was Always Bound To Burst.” Schell was one of the first American journalists to chronicle China’s stock markets. Here’s a piece he wrote with Todd Lappin for The Nation in 1992, about the birth of the Shanghai stock exchange. —The Editors

Until recently, the Pujiang Hotel on Shanghai’s waterfront was distinguished only by its sooty exterior, grimy windows and gloomy interior decor of dark wood paneling and peeling plaster. During the 1920s, when the building was known as the Astor House, it had been one of the most deluxe hotels in China. But when the People’s Liberation Army marched into Shanghai in 1949, the fortunes of the Astor House fell into a spiral of decline, and its liveried doormen, elegantly appointed rooms and French restaurant with palm garden were soon no more than a distant and almost unimaginable memory.

On December 19, 1990, the waning fortunes of the Pujiang took a sudden turn for the better when a caravan of limousines arrived at the main entrance and disgorged a procession of luminaries, the likes of which the hotel had not seen for almost half a century. Included in the retinue of 500 high ranking dignitaries were Zhu Rongji, Shanghai’s Mayor at the time (and currently a Vice Premier); Huang Ju, the Vice Mayor; Liu Hongru, Vice Minister of China’s State Commission for Restructuring the Economy; Lady Lydia Dunn, Chairwoman of Hong Kong’s Trade and Development Bureau; and an assortment of foreign investment specialists. To enthusiastic applause, the distinguished visitors ceremonially unveiled a brass plaque marking the hotel’s rebirth as the home of the Shanghai Securities Exchange, China’s first national computerized stock exchange.

During this milestone event, Mayor Zhu gave a speech in which he reminded the assembled guest that even after the turmoil of 1989, China had refused to abandon its policy of modernizing and opening up to the outside world, and he promised that the city of Shanghai would continue to reform its financial institutions as a crucial part of its own modernization drive. Minutes later, the opening gavel came down in one of the Pujiang’s refurbished ballrooms, and 100 red-waistcoated brokers sitting at computer-equipped desks arrayed around a new electronic “big board” began their first day of securities trading.

Long before December 19, however, word had spread to other Chinese cities that Shanghai was about to open a stock exchange, and the news created no small amount of envy. Almost every other competing center of trade and commerce, it seemed, was vying for a full-fledged exchange of its own, and on December 18, 1990—a day before the exchange in Shanghai officially opened—the Shenzhen Special Economic Zone, just across the border from Hong Kong in South China’s Guangdong Province, boldly decided to jump the gun. Without receiving prior sanction from Beijing, Shenzhen officials unilaterally announced plans to convert the city’s over-the-counter stock market to an open exchange.

Party leaders in Beijing were infuriated by this defiant act. Fearful that they might soon face challenges from other insurgent stock markets around the country, they moved quickly to control this unprecedented rebellion. At the same time, however, officials in the capitol helped to avoid an open confrontation that might lend to an ugly showdown with Guangdong Province, one of the most economically powerful and independent-minded regions in all of China.

...the main proponent of this dramatic change in economic practices was none other than Deng Xiaoping himself.

Beijing finally decided to defuse the situation by allowing Shenzhen to become an open exchange if the city would agree to postpone the official opening of its new market until spring. Such a compromise enabled the party’s central planners to maintain the appearance that they were still controlling China’s economic reforms, which had languished after the 1989 Beijing massacre before again gathering momentum in late 1990.

Since the new Shenzhen Securities Exchange had already coronated itself by hanging a brass plaque outside its offices, after the compromise was reached local authorities had to hastily cover it up with a piece of red cloth until after the official opening. At the time, few Chinese were aware of the struggle between Beijing and Shenzhen, but the conflict underscored the tensions that were developing between China’s central government and regional authorities as Deng Xiaoping’s economic reforms allowed localities to seize more and more responsibility for their own economic destiny.

I.

When the doors of the Shanghai exchange swung open on the first day of business, only seven listings were available for trading, and most of them were unexciting, fixed-interest bonds. By the close of 1991 the two “big boards” in Shanghai and Shenzhen offered only fifteen and seventeen listings, respectively. These were but a tiny fraction of the more than 3,000 issues that Chinese enterprises were already selling to their employees and over-the-counter investors throughout the country. But given the government’s discomfort with both the idea of selling off the heart and soul of its industrial infrastructure and the disorganization that reigned in China’s incipient financial markets, few state-owned enterprises in the public sector were allowed to issue shares on the new exchanges. Instead, most of the companies listed on the exchanges were collective enterprises. Despite having cloned this capitalist gene onto China’s socialist chromosome, government regulators at the Bank of China still tried to limit the amount of securities these enterprises could sell to private investors (as distinguished from government entities) in order to maintain the appearance that China still had a socialist economy, in which state ownership predominated.

Nonetheless, by the end of 1991 the Shanghai market alone had already registered 100,000 official individual investors—double the number of the previous year—while nobody had any idea how many more private punters had purchased shares in the numerous joint-stock companies not officially listed on the exchanges that proliferated as a result of Deng’s economic reforms. The government’s concern about this increasingly chaotic and unregulated market had been one of the main incentives for officials in Beijing to establish the Shanghai and Shenzhen exchanges in the first place.

However, by permitting such financial markets to become a legitimate part of China’s “socialist market economy,” the government was, in effect, admitting that the old system of state ownership, centralized planning and government subsidies had failed. Surprisingly, the main proponent of this dramatic change in economic practices was none other than Deng Xiaoping himself.

As an economic pragmatist, Deng recognized that the economic retrenchment program, undertaken after the Beijing massacre and intended to bring China’s 20 to 30 percent inflation rate under control, had left government coffers badly depleted. He was also painfully aware that 20 percent of the state’s annual revenues were being used to prop up the more than 60 percent of all state-owned industries that were unable to turn a profit. Deng knew that in the long run the government simply could not continue to bear the burden of such massive subsidies without running up increasingly large and dangerous budget deficits.

There were only three alternatives: Force these overstaffed, undercapitalized and technologically backward industrial behemoths into bankruptcy, try to find foreign joint-venture partners or let them finance themselves as joint-stock companies. Although government officials had advocated eliminating the worst of these state-owned enterprises by declaring them bankrupt (in fact, a provisional bankruptcy law had even been passed in 1986), Marxist die-hards found the idea of forcing workers out of their jobs even more repugnant than the notion of creating capitalist-style stock markets. Most party officials remembered all too clearly what had happened in Poland after dissatisfied workers formed the independent labor union Solidarity and rose up against that country’s Communist regime in 1980, and they had little desire to contract the “Polish disease,” which would force them to quell a new round of protests by angry and economically disfranchised members of the Chinese proletariat. Memories of how workers had poured into the streets to join forces with demonstrating students during the last weeks of the 1989 protest movement were the stuff of party nightmares.

Starting Small

The idea of selling securities as a way of generating capital was not entirely unheard of in the People’s Republic. China had been experimenting with financial markets since 1981, when Beijing first issued a series of treasury bills to finance the country’s modernization drive after the economic debacle of the Cultural Revolution. The symbolic nature of this initial break with Maoist economic theory, which categorically rejected any form of national debt, was extraordinarily significant, and the T-bills quickly presaged the introduction of other capitalist-style financial instruments. Before long, ambitious rural collectives, cash-starved local governments and even a few state-owned enterprises were issuing stocks and bonds themselves, and ordinary Chinese were embracing these new investment opportunities with enthusiasm. Soon thousands of businesses were selling securities to their employees, while others began hawking stocks and bonds to private investors on city street corners.

To impose some semblance of order upon this ad hoc trading network, in 1986 Beijing authorized the Manchurian city of Shenyang to set up China’s first “stock market.” The name sounded grandiose, but this initial “exchange” was really only a single cashier’s window in a local bank office where the prices of a few fixed-interest, government-approved bonds were listed on a blackboard hanging on the wall. Next, the cities of Beijing, Wuhan, Tianjin, Canton, Chongqing, Guangzhou, Harbin and Shenzhen received permission to set up their own local markets, and with little prompting, hordes of small investors flocked to take advantage of what seemed like high rates of return compared with the relatively low interest rates derived from bank savings accounts.

China’s new securities markets gained additional momentum after October 1987, when the Thirteenth National Communist Party Congress concluded that shareholding was a legitimate form of property distribution in socialist enterprises. With this high-level nod of approval, China’s economic reformers moved to expand the country’s financial markets even further, and by March 1989 they had set up a Stock Exchange Executive Council to study the question of solidifying the regulation and organization of China’s future securities exchange system. The council assembled a staff that included several bright young foreign-trained Chinese economists and legal experts who had experience on Wall Street to design the financial markets of “socialism with Chinese characteristics,” as Deng had taken to calling China’s polyglot economic system. A month after the council was formed, however, protesting students flooded into Tiananmen Square.

In the immediate aftermath of the Beijing massacre, plans to expand China’s nascent stock markets were abruptly shelved. With conservative central planners exercising control over the government’s economic policy offices once again, efforts to encourage state enterprises to privatize and sell shares, much less create a nationwide securities exchange, became ideologically taboo.

Had it not been for Deng Xiaoping’s steadfast support for the reformist cause, it’s unlikely that the notion of economic liberalization would have survived the crisis of 1989 at all. Deng was hardly an advocate of liberal democracy, but his enthusiasm for China’s grand experiment with crypto-capitalist market mechanisms remained steadfast. Equally important, after seven decades of experience within the fractious party leadership, Deng had mastered the art of discerning how and when to move against his political rivals.

Deng’s Great Leap

In January 1992 China’s 87-year-old “paramount leader” made one of his boldest moves since launching his reform program in 1978. Having avoided public appearances for more than a year, Deng took off on an unexpected pilgrimage to the glittering symbol of China’s economic miracle, Shenzhen’s thriving Special Economic Zone. In his characteristically terse way, Deng proclaimed that the importance of Shenzhen’s experience was “the courage to blaze new trails.” As if to underscore exactly what he had in mind, Deng then paid tribute to Shenzhen’s new securities exchange.

“Are such things as securities and stock markets good or bad?” he rhetorically asked the group of high-ranking Guangdong provincial officials who accompanied him on the trip. “Is there any danger in adopting such things? Can they only exist under capitalism? Cannot they also be adapted to socialism?”

For Marxists, these were questions of a very complex and delicate theoretical nature, but Deng had ready answers. “A planned economy does not equal socialism, because planning also exists in capitalism,” he said. “A market economy does not necessarily equal capitalism because the market also exists in socialism. In order to make socialism superior to capitalism, we must boldly take heed of and absorb all the accomplishments of civilization that the human race has achieved,” including “all the advanced modes of operation and management developed by other countries.” What relation did this sweeping redefinition of socialism have to China’s infant stock markets? “People should be allowed to keep observing, but in the meantime resolute action must be taken to experiment with such things,” Deng proclaimed.

With these words, Deng instantly removed any uncertainty about his own position regarding the expansion of organized financial markets in China. Predictably, reformers welcomed his call for “bold experimentation,” while orthodox Marxists found such comments deeply vexing. To blunt the impact of Deng’s pronouncements, they moved to limit media coverage of his southern hegira. However, after a month of behind-the-scenes manipulations, Deng’s allies in the Central Committee finally managed to transmit the text of his speeches throughout the country as an official party document. The effect was instant and galvanic. Instead of running their usual barrage of editorials warning against the omnipresent dangers of “bourgeois liberalization” and “peaceful evolution”—terms that hard-liners were using in reference to foreign influences they considered noxious—the official press suddenly bloomed with encomiums about the miraculously curative powers of financial markets to rescue China’s ailing state-owned industries from irreversible decline.

In late February, even the normally conservative People’s Daily finally weighed in with an editorial calling for “utilization of the useful aspects of capitalism,” arguing that “it is ridiculous to label all measures used by capitalist countries as solely capitalist, and refuse to accept them.” By March the paper was also proclaiming that “active and prosperous financial markets will bring the country innumerable benefits.” Although the editors warned against the practice of “blindly” developing stock markets, they nonetheless echoed Deng’s call for Chinese to “boldly make experiments and breakthroughs” in implementing shareholding systems so that “a joint-stock economy can serve our socialist construction.” For now Deng had won in his struggle with the old guard.

The rapid change in the official media’s attitude toward the notions of accelerated reform and expanding Chinese capital markets was so abrupt that it almost seemed as if some mind-altering gas had been added to China’s air supply. Even for the reformers, the benediction of China’s two new securities exchanges by the party’s paramount leader was a shift that took some getting used to. After all, China was still ruled by the same “people’s government” that had so self-righteously closed down the Shanghai stock market after “liberation” in 1949; permitting such an institution to become an important part of China’s new economy raised the embarrassing question of what socialism meant if a purportedly socialist state allowed an indolent class of speculators, rentiers and coupon-clippers to live off the toil of the proletariat.

Deng Xiaoping, however, has never been much interested in such theoretical issues. His putative 1979 statement that “black cat or white cat, it’s a good cat if it catches mice” is not only his most famous utterance but to this day remains the most apt summation of his ideological pragmatism. When forced to choose between Marxist-Leninist orthodoxy and a series of economic reforms that might prolong the life of the country’s much-vaunted “people’s democratic dictatorship,” Deng made the obvious choice.

People’s (Republic) Capitalism

In March China’s Politburo confirmed Deng’s triumph over the hard-liners, saying that “to judge whether something is ‘socialist’ or ‘capitalist’ will depend mainly on whether it will benefit the development of productive forces under socialism, the enhancement of comprehensive national strength of our socialist country and the promotion of the living standard of the people.”

For the sake of appearances, party theoretical cosmeticians were called in to give this new “great leap forward” a semblance of congruity with the Marxist canon. The tenuous lines of argument they constructed to justify such a dramatic policy reversal attested to the difficulty of their assigned task. “A tangerine growing in southern Anhui is called a tangerine, but the same fruit is called an orange if it grows in northern Anhui,” rationalized one commentary in Xinhua Ribao during early May. “The same object may have different characteristics in different social environments. Securities and stocks are ‘capitalist’ in a capitalist society and are used by capitalists to exploit workers. But they can, however, be ‘socialist’ under a predominantly socialist environment.”

As Deng’s new line was publicized, no one proved more enthusiastic about the idea of trading in stocks and bonds than ordinary Chinese, many of whom demonstrated their approval by stampeding down to brokerage houses to get in on the anticipated windfall profits. The small number of initial listings did nothing to deter these eager new investors from queuing up by the tens of thousands to get a piece of the action. In fact, it only seemed to increase their eagerness, motivating many to wait outside the new trading houses for hours on end like teenage fans hoping to get tickets to a performance by a popular rock group.

Of course, relatively few of these would-be investors had a very sophisticated understanding of how financial markets actually work, much less an awareness of the downside risks of securities trading. Most simply reasoned that since Deng himself had anointed the exchanges with his blessing, stocks and bonds must be a good thing—something like putting money into a savings account, only considerably more lucrative. And, with one of the highest savings rates in the world, China was a financier’s dream. During 1992, the country’s savings rate was running somewhere around 30 percent, creating an underutilized investment pool of 1.3 trillion yuan ($260 billion) that had no place to go other than low-yield bonds and bank savings accounts. For Chinese hoping to find new and lucrative places to put their money, the Shenzhen and Shanghai exchanges seemed like a godsend, especially since the incredible demand for securities caused the value of most shares to skyrocket as soon as they were listed. Investors may not have understood the vagaries of price-earnings ratios, but they quickly recognized that instant fortunes could be made when a share price doubled in value almost overnight, an occurrence that was suddenly not uncommon. Among the lucky investors who bought stock in the eleven companies listed on the Shanghai exchange during November 1991, most paid roughly 7,000 yuan ($1,400) for 2,000 shares. By August 1992, however, these same 2,000 shares were worth somewhere between 30,000 and 50,000 yuan. With returns such as these, it was hardly surprising that ordinary Chinese were quickly seized by stock-exchange fever.

By the end of last winter, the demand for the limited number of listed issues had become so great that officials in Shanghai found themselves overwhelmed by the huge crowds flocking to the trading counters each day. To solve the problem, Shanghai authorities adopted a system of numbered tickets similar to the one used at busy delicatessens in the United States. But rather than entitling an investor to actually buy securities, these so-called share purchase certificates—each of which cost 30 yuan ($6)—merely allowed buyers to enter a lottery in which only those lucky enough to have their number drawn were entitled to register with a brokerage office and purchase a limited quantity of securities.

The system was hardly an unqualified success. Brokers immediately found themselves inundated by massive crowds of people trying to buy coveted share purchase certificates. Investors were so determined not to be left out that many even camped out overnight to secure a good place in line. Of course, it didn’t take long before speculators and liumang, or petty gangsters and hoodlums, realized that there was just as much money to be made by selling these certificates on the black market as there was in trading stocks and bonds themselves. Lines in Shanghai quickly became packed with fast-buck artists, as tens of thousands of people brought with them folding chairs, bedding, supplies of food, canteens of water, fans, portable radios, umbrellas and even their children as they waited for a chance to buy a share purchase certificate.

In Shenzhen, where a similar system was introduced, fist fights broke out and two men were even murdered as gang members fought over positions in line; Public Security Bureau police had to step in to restore order. Certificates that originally cost 30 yuan sold on the black market for 1,400 yuan ($280)—a premium of more than 4,000 percent. And this free-for-all of speculation was not limited to the illegal sale of certificates. The market for the securities themselves was so hot that scalpers in the streets also began hawking black market shares at vastly inflated prices.

Of the lucky few who were able to get certificates and then reach Shanghai stock counters, many were disappointed to find that not only was the total number of shares they could buy limited but there were only a few companies whose stock was for sale when they were finally able to buy. As one Chinese friend put it, “The long wait reminded me of the days when we used to have to line up like Russians at food stores, and then buy whatever happened to be available in the market at that moment.”

Up, Up and Away!

In the middle of April 1992, a frisson went through the Shanghai market when a sudden downward correction created what one Chinese financial columnist (a new breed of journalist for the P.R.C.) characterized as a wave of “frenetic trading.” For many Chinese who imagined that the market only went up, it was a rude surprise.

To help cushion the shock of such unpleasant corrections, the government took to printing a cautionary message alongside the stock quotations in Shenzhen papers that said, “The stock market involves risks.” However, this benign admonition seemed to have no more effect than the cancer warnings by the U.S. Surgeon General on cigarette packages. As a bull market began again, Chinese were in no mood to listen to the voice of prudence.

Indeed, the craze to invest on the Shanghai exchange only gathered more momentum than ever in May, when officials removed the regulations that had previously controlled the amount a share price could move up or down on any given day. On May 21 alone, during the first day of trading under the liberalized rules, 417,000 shares with a total value of 180 million yuan ($36 million) changed hands. This was twice the volume of the day before, and it made the index skyrocket to double the previous week’s already record high.

Weekly stock reports about this bullish market drove price-earnings ratios through the roof. In Shenzhen the ratios rose to the high 80s, while in Shanghai they climbed to the 300s. One Chinese issue even reached a ratio of 500 to 1—a spread that was worthy of a place in the Guinness Book of Records, according to one Chinese reporter. Of course, these staggering price-earnings ratios had nothing to do with the soundness or profitability of the issuing companies. On Hong Kong’s Hang Seng index, for example, ratios remained at less than twenty to one for most stocks. In China, the dramatic spread stemmed from one simple fact: Officially listed securities were in short supply, while buyers were not.

Fearful that the market was losing all sense of reality, authorities intervened in late May to reimpose some trading limits. When combined with widespread rumors that the exchange was preparing to list thirty-four new share offerings, news immediately sent the volatile market tumbling. By June 1, sell orders were pouring into Shanghai in such volume that brokers were forced to open an annex in a city square to handle the deluge of agitated investors who wanted out. But before they had handled even 600 orders, security police lost control of the more than 5,000 people trying to shove their way up to the trading counters, and the annex had to be shut down. When panicky officials scrapped the restrictions, the market regained some of its lost ground, but the frenzy hardly abated. Just a few days later, two people were killed and twenty more were injured when tens of thousands of crazed investors mobbed a Shanghai sports stadium where shares were being distributed.

The Shenzhen exchange was hardly more stable. In the beginning of June the Shenzhen index plunged when the government announced that it was going to look into allegations concerning illegal speculation by financial institutions involved in the securities trade. Things leveled off somewhat by July, but by then the weekly graphs charting the precipitate ups and downs of the two new exchanges were as jagged and saw-toothed as a profile of the High Sierras.

Contributing to the volatility of the situation was the absence of an overarching government agency similar to the U.S. Securities and Exchange Commission, uniform accounting procedures or a business law to provide a juridical framework for enterprises planning to issue shares. Technically, it was the responsibility of the Bank of China to regulate the sale of securities, but China’s new financial markets were creating such a sensation that it often seemed as if nobody was In control.

What made investors so crazed was the fact that in the spring of 1992, after Deng’s trip south, both the Shenzhen and Shanghai markets repeatedly soared to new heights—meaning that there was plenty of money to be made despite all the ups and downs. Between December 1991 and July 1992, the Shanghai index rose from Just above 100 to over 1,200 before settling at around the 800 level. In Shenzhen, the index rose from 120 to almost 300 before leveling off at around 275. By June 1992, more than 360,000 investors had purchased shares on the Shenzhen exchange, and this number was growing by approximately 20,000 each month. During the bullish first half of 1992, the total value of transactions on the two exchanges was 5.2 billion yuan ($1 billion), based on a volume that was five times higher than the total for the entire preceding year. Simultaneously, enthusiasm for investing in securities had spread throughout the country, and Chinese were reported to be holding a total of some 60 billion yuan ($12 billion) worth of notes. By August, eighty-three of the Shanghai exchange’s 103 trading members were based outside the city. By September the number of seats had risen to 212, a figure that was expected to grow to more than 600 in the near future.

Popular excitement about the new stock exchanges remained so great that Shanghai officials had to delay the listing of twenty-six newly approved stocks because officials had not yet figured out how to cope with the physical bulk of all the cash that the nearly 1 million Shanghai investors who held share purchase certificates were expected to bring to the market. They were also fearful that this new infusion of shares might spark a crash by altering the chemistry of scarcity that had driven prices so high.

The Stuff of Dreams

Capital-hungry enterprise managers ecstatically welcomed this investor interest in securities and cheered government plans calling for more than half of all state-owned industries to convert to a shareholding system within the next five years. For them, the thought of issuing shares and being able to raise unheard-of amounts of cash almost overnight seemed like divine providence. By the same token, many Chinese, whose “work units” had previously forced them to buy bonds through payroll deductions in lieu of their full salaries during the post-1989 economic retrenchment, also underwent a sudden conversion with regard to their compulsory investments. “By becoming shareholding companies, firms can help their employees become rich because share prices on the local stock market keep rising,” a staff reporter with China Daily wrote breathlessly.

In several well-publicized cases, such as that of the Shanghai Special Steel Tubing Company, he was absolutely right. When the company was first listed on the Shanghai exchange on May 25, employees were stunned to learn that the shares they owned had risen 471 percent during the day’s trading, yielding an average windfall profit of some 20,000 yuan ($4,000) for each worker. And it was not difficult for other Chinese to imagine that the streets would soon be paved with gold when they heard the story about the Yuyuan Company, whose stock sold for only 100 yuan ($20) when it was initially listed, but which by the middle of March had shot up to 4,329 yuan ($865). Tales such as these were the stuff from which new and fantastic Chinese dreams were being made, as confirmed by a survey conducted in July by People’s Daily, which revealed that almost one-fifth of China’s 1.2 billion people were thinking about buying into the stock market.

“In today’s Shanghai everything related to stocks is in great demand,” one Shanghai Securities Exchange broker told the New China News Agency. Tiny radios that tuned in to special stock reports became all the rage among investors as radio stations and television channels rushed to include market reports in their daily broadcasts. A special twenty-four-hour phone number was established in Shanghai to provide around-the-clock quotations, while several hotels in the vicinity of the Pujiang opened special stock exchange “saloons” where market devotees could hang out and swap hot tips. Although the cover charge at such establishments was a hefty 30 yuan ($6), or about a tenth of an average worker’s monthly salary, the saloons were almost always filled to capacity. At times the clamor became so great that neighbors complained. Near one saloon, someone was reported to have posted a sign in the street saying, “We wish that you make big money, but please try to be a little quiet and not disturb us.”

Newspapers and magazines became filled with columns and articles advising readers on how to play the market.

Brokerage houses also began currying favor among a new set of Milkenesque high rollers known as dakuan—or “big bucks,” because some of them had more than 500,000 yuan ($100,000) invested in the market—by setting up special lounges where the dakuan could watch the buy and sell orders on a computer screen while enjoying complimentary snacks.

Newspapers and magazines became filled with columns and articles advising readers on how to play the market. Getting a copy of the “Shanghai Securities Weekly,” a newsletter printed by the exchange itself, inevitably involved standing in line even though its print run was up to 150,000 copies. In fact, any publication with the words “stocks” or “bonds” in its title tended to sell out almost before it hit the stands.

One large Beijing bookstore was reported to have sold its complete stock of 1,000 copies of the paperback 183 Tricks of Playing the Stock Market in a matter of hours, while the Xinhua Bookstore in the busy Wangfujing shopping district could not keep copies of The ABCs of Investing in Stocks on its shelves.

“We’ve tried our best to place orders with publishing houses all over the country and push them to publish or reprint more such books as quickly as possible,” lamented Qi Fengju, the manager of the economics section. “However, the supply still can’t meet the increasing demand.”

For those who couldn’t locate copies of these popular books, it was always possible to attend one of the new private schools that were hastily organized to teach the mysteries of the stock market to potential Chinese investors. “I’m counting on this to make me rich,” one unemployed youth told a New China News Agency reporter after registering for classes at the Wanlong Securities Night School. The school had been founded by Sun Puqin, an economics professor from Beijing’s Finance and Economic College, after a single small newspaper advertisement brought him 120 eager students willing to pay 180 yuan ($36) to enroll in his three-month course. “In the past, we didn’t dare think about these things. But after what Deng Xiaoping said, we have greater faith,” declared a 55-year-old pharmacist, another of Sun’s eager new students.

The advent of computerized stock trading may have been a new beginning for many Chinese investors, but for some it was the end of the line. In early May, a columnist for China Daily half-jokingly noted that “China’s stock market won’t truly be mature until a few people have jumped out of windows.”

It wasn’t a long wait. One week after the article appeared, Shanghai’s Liberation Daily announced that a 41-year-old resident named Tang had hung himself in his home after losing $l,000 during the April market correction. It was the first stock market-related suicide in China since 1949. Lamentably, if Tang had been just a little more patient, he would have more than recouped his losses during the bull market that began in mid-May.

Soon there were other Chinese market casualties. In June the People’s Republic marked its second known stock-exchange suicide when a 39-year-old worker named Liu Xiaodong electrocuted himself after losing 4,000 yuan ($800) of borrowed money when the market suddenly tumbled after its epic May rise.

II.

In spite of these parenthetical tragedies, the first half of 1992 was a manic period for China’s nascent securities exchanges. Officials in other cities watched Shanghai and Shenzhen with thinly veiled envy, champing at the bit to get in on the action themselves. Even conservative Beijing expressed an interest in getting in on the boom. In April, Chen Yuan, vice governor of the People’s Bank of China, announced that he favored opening an exchange in the capital. Chen’s declaration was particularly surprising because he owed his prominent position to the patronage of his father, Chen Yun, the ultraconservative economic central planner and leader of the Central Advisory Commission, a council of elders that had steadfastly cast aspersions on Deng’s policy of accelerated economic reform. Chen Yuan’s desire to open more exchanges was shared by almost every other large city in China. In Sichuan Province, the Chongqing Branch of the People’s Bank of China allowed three enterprises to issue publicly 61.3 million yuan ($12 million) worth of stock without obtaining approval from the central government, and to start selling share purchase certificates. Not surprisingly, the price of the certificates quickly shot up from 5 yuan to over 1,000 yuan ($200). Much the same thing happened in Fujian Province, where on June 15, even though Beijing had not given local officials permission to establish an open market, the Xiamen Municipal Joint-Stock Experimental Unit Leadership Committee authorized twenty-six companies to issue and sell stock publicly. Capitalizing on this news, brokers in the city began selling share purchase certificates at 5 yuan at locations throughout the city. By the end of the day some 400,000 certificates had been sold, and the black-market price had shot up to 110 yuan each.

On Hainan Island, another region known for acting first and seeking permission from Beijing later, market boosters simply opened a securities exchange of their own without even bothering to obtain Beijing’s approval. Less than a month after trading started, however, Zhu Rongji, China’s Vice Premier, personally traveled to Hainan to close down the renegade exchange. “He swatted us like a fly,” a Hainan official told Lincoln Kaye of the Far Eastern Economic Review. “He worried that if we could launch a stock market on our own, soon they would be sprouting up all over the country.” Zhu’s intervention did little to subdue the stock trading frenzy in Hainan. Refusing to be thwarted by Beijing, speculators simply set up a “gray bourse” and continued to sell securities through a decentralized system of independent brokerage houses.

In an effort to rein in these upstart tendencies, the Bank of China and the State Council in Beijing issued a statement reaffirming the policy that “the issue of stocks, investment fund certificates and trustee certificates must be strictly reviewed according to regular procedures,” and that “no local body, unit or individual has the right to violate the review process, breach authority or make unauthorized approvals for issuing or listing stocks or securities” without “being held accountable to law.”

It was obvious that moves to establish rogue exchanges in the provinces made officials in Beijing extremely nervous about the prospect of losing control over the entire reform process. It was also obvious that Beijing’s ability to restrain the provinces from seizing control of their own economic destiny was tenuous indeed. With increasing regularity, one began to hear Chinese in Beijing saying guanbuliao tamen, or “it’s impossible to control them,” while speaking about the regionalization of China’s economy.

“In the long run, I really don’t think the government will be able to control this thing,” Gao Xiqing, general counsel and executive director of the quasi-governmental Chinese Stock Exchange Executive Council, admitted to us. “The problem is that regional governments don’t really listen to the central government. To get around their policies without approval, they simply interpret rules and regulations as they wish. If they want to allow enterprises to sell stock, they just call it ‘an internal offering to employees’ and then turn around to sell shares to the public on the sly. What can the central government do to stop it?”

To stem the flood of unapproved securities, in mid-June China’s State Council and the State Commission for Restructuring the Economy began issuing a new set of administrative procedures to standardize the process of forming joint-stock companies and issuing, listing and trading securities. “The urgent task now is to work on standardization, and to insure that the experiment develops healthily so as to facilitate the exploration of a correct way to develop socialist shareholding enterprises and stock markets during the implementation of reform,” wrote Liu Hongru, Vice Minister of the commission, in a June 23 People’s Daily article. After rationalizing the approval of financial markets by citing various passages of canonical Marxist texts, Liu urged the quick promulgation of new regulations.

“When laws and regulations are incomplete, they cannot effectively protect the interests of the broad masses of investors and the normal business activities of the shareholding enterprises,” he said. He also warned that, “although the experiment in the shareholding system and stock markets has developed rapidly, and although people’s enthusiasm is great, many shareholding companies have failed to meet the demands of standardization . . . creating a bad influence.”

In an effort to realize some measure of “standardization,” the governor of the People’s Bank of China was ordered to supervise a new China Securities Supervisory Management Committee that would review companies seeking to issue shares and insure that markets operated according to the new regulations. The watchdog agency was also charged with trying to control the rampant spread of unauthorized shares that were being traded on China’s streets and the widespread speculation that was driving the markets to such dizzying heights.

The supervisory committee’s formation came hardly a moment too soon, because by mid-summer it was rumored that major market manipulations were taking place behind the scenes among members of the so-called taizidang, or “prince faction”—the sons and daughters of high-ranking Communist Party officials. By investing heavily in companies that they knew would soon be issuing stock, and by using their influence to get their favorite companies approved for listing on one of China’s new exchanges, the young “princes” were able to make a killing by buying in early and then selling their holdings just after issues hit the market and share prices soared under the pressure of eager small investors rushing in to buy.

Going for Broke

Stocks and bonds were not the only capitalist-style market mechanism China adopted during this hectic period as it sought to enlist the “invisible hand” of supply and demand to weaken the deadening grip of central planning in the management of the country’s economy.

In late May China crossed another Rubicon when the country’s first futures exchange was opened in Shanghai to begin trading in contracts for nonferrous metals. Showing no signs of Maoist prudery, the inaugural gala featured a banquet that climaxed when fifty seductively attired female comrades arrived like so many hired taxi girls for the dancing pleasure of the Metals Exchange’s male guests. “It’s a historic event for China.” commented Dale Lorenzen, a visiting first Vice Chairman from the Chicago Board of Trade, about the new exchange, although he might just as easily have been referring to the presence of the young women.

China’s avid speculators quickly took to this new investment medium, and within two months of its splashy opening, the daily volume of trade on the Metals Exchange was over 150 million yuan ($30 million).

Meanwhile, a chain reaction of sorts had begun. In Henan Province, officials announced that the Zhengzhou Wholesale Market, China’s biggest commodities market, had put a group of experts to work around the clock designing an agricultural futures contract trading system that would open in the spring of 1993. This news was a particularly poignant reminder of how far China had drifted from its ideological moorings, because orthodox Communists during the pre-1949 period looked upon the idea of futures trading as little more than a glorified form of gambling—one of the infamous “six evils” that included slave trading, drug dealing, prostitution, superstition and pornography—and thus even more odiously bourgeois than the sale of stocks and bonds.

How Now, Mao?

All these dramatic new experiments left one with the inescapable impression that China’s old system of state-owned enterprises and central planning was under assault by China’s paramount leader himself. There was something about Deng’s enthusiastic call for stock-market experimentation and the frenzied popular response it had produced that was eerily reminiscent of the exhortations by Mao that kicked off the Cultural Revolution. Just as Mao had been forced to go to “leftist” Shanghai to circumvent the resistance of Beijing party regulars in 1966, so too Deng had been forced to abandon the stronghold of hard-line Marxist conservatism in the capital and visit liberal Shenzhen to make his appeal for economic reform. And while Mao had urged the Red Guards to “bombard the headquarters” of a party whose leadership opposed his radical political line, Deng now called upon Chinese entrepreneurs to arise and create new securities exchanges and to introduce other market mechanisms into the Chinese economy in defiance of conservative opposition. Both Mao and Deng had appealed over the heads of other leaders to mobilize their respective “mass” constituencies, and both evoked a similar totalistic, unquestioning and exuberant response from their adherents.

The zealousness of these responses stems from the age-old tradition of obedience to the ruler that the Communists have inherited from China’s imperial past. Yet at the same time, another part of the phenomenon is rooted in the crisis of identity that has gripped China ever since the fall of the last dynasty in 1911—an event that left the Middle Kingdom vulnerable to ceaseless radical shifts in political ideology and periodic seizures of blind optimism followed by unalloyed pessimism. Economics is the current focus of China’s ongoing quest for historical salvation, and the Chinese have pursued this quest for wealth with much the same ardor that they once reserved for class struggle and mass political movements. But how any single society can embrace such contradictory belief systems and monumental extremes is a question that the advocates of economic reform seem wary of asking. Only in passing did an article in a July issue of China Daily broach the subject. “Going to extremes finds its best expression in economic reforms,” the paper said with unusual candor. “China is changing its old economic mode to a new one. Some people either negate every part of the old system or affirm every part of the new system. Going to extremes is an illogical way of thinking.”

Countering the Conservatives

China’s hellbent economic extremism also has complex roots within the Communist Party’s long history of factional struggle. Sharp ideological divisions within the Central Committee have encouraged members of each competing faction to press ahead fanatically with their economic and political programs whenever an opportunity to expand political leverage arises. China’s vast population has become highly adept, too, at anticipating the practical implications of these political realignments almost as soon as they take place. When the political winds shifted after almost three decades of sacrifice and self-denial under Mao, many Chinese were more than ready to indulge themselves in private gain. Chinese politics are so quixotic that everyone knows such opportunities can come and go in the blink of an eye. Few have forgotten how the country’s earlier flirtations with financial markets and stock exchanges were abruptly put on hold in the aftermath of the Beijing massacre. And everyone is aware that even though Deng’s line of liberal economic reform coupled with strict party political control is now ascendant, neo-Maoists have still not completely lost their influence.

“Conservative hard-liners had several concerns about the negative effects of stock markets on ordinary people,” says Gao Xiqing. “For people to get rich without working was, in their view, no better than speculating. But they also feared that socialism would be eroded as discrepancies between the rich and the poor grew larger, and public ownership was compromised by the corporatization of state enterprises.” As one local Shanghai broker told New York Times reporter Nicholas Kristof in a way that made it impossible to know whether he was being facetious, “We’re in a transition to capitalism, conducted under the leadership of the Communist Party.”

This time around, however, members of the reform faction have taken some very shrewd steps to insure that party conservatives will find it difficult to reverse the latest innovations. Just after Deng’s trip south, select Chinese enterprises were allowed to start issuing so-called B shares, a special series of securities designed specifically for sale to foreigners. This represented another significant milestone in China’s long process of economic reform, especially given the party’s extreme sensitivity concerning the historical legacy of foreign imperialism. But as far as Deng was concerned, the dangers of allowing foreign investors to own a stake in China’s development were more than offset by gaining access to a new source of capital to fuel China’s modernization drive. Moreover, with foreigners as investors, it became all the more risky for conservative leaders to think of “reversing the verdict” on these new securities markets, since such a move would now represent an attack on the hallowed institutions of international finance.

During 1992 foreign investors were well aware that China’s economy had been enjoying double-digit growth while most of the rest of the world was floundering in recession, so the B shares caught on like wildfire. When the Shanghai Vacuum Electron Device company put 1 million B shares on the market in December 1991, investors grabbed them all up within the first day. For most Hong Kong traders, the problem was not selling B shares but getting enough to satisfy their clients.

Needless to say, Chinese enterprise managers and executives were also overjoyed at the thought of attracting a massive infusion of hard currency simply by selling off a few thousand sheets of paper. But it created a dangerous mentality of easy money. “Most enterprise managers don’t make any connection between selling stock and expanding the net worth of their business,” lamented a Shanghai think-tank director. “They see the issuance of stock simply as a quick and easy way to get rich and buy a new corporate car.”

The prospect of suddenly having a lot of cash to play around with sparked plenty of grandiose dreaming. Chairman Xue Wenhai of Shanghai Vacuum began fantasizing about using the $67.5 million in proceeds earned during one early B-share offering to construct a shopping center in Beijing, a factory in Mexico and hotels in Mauritius. He was also thinking of setting up trading ventures in Australia and the Virgin Islands. As Kaye of the Far Eastern Economic Review put it, a “cargo-cult mentality” had begun to infect the issuers of shares as well as investors in the Chinese market. The Beijing Review crowed in August, “A golden age for the big development of stocks in China is drawing near.”

Outside investors took more than a little notice when the Shenbao Industrial Corporation made $1.34 million worth of B shares available for sale on the Shenzhen Securities Exchange in mid-June; overseas investors inundated the local branch of the Bank of China with some $112 million in subscription funds—more than eighty times the par value of the available securities.

“Such a sensational subscription is rarely seen in the international stock market,” said a dazed Liao Xiwen, general manager of the Stock Company of the Shenzhen Special Economic Zone, at a press conference. “It attests to overseas investors’ confidence not only in the Shenbao Industrial Corporation, but also in Shenzhen’s stock market and the country’s economic development.”

Beijing had hardly uttered a single word about liberalizing China’s autocratic political system.

Liao seemed to be right. By July 16 foreign bankers had set aside some $2 billion for investment in B shares, while The Wall Street Journal reported that some twenty different worldwide funds had been established to focus exclusively on Chinese investment opportunities. During the last two weeks of July alone, the first three of these funds to begin trading on the New York Stock Exchange poured some $300 million into Chinese securities markets, and several overseas investment funds even sent special emissaries to China to uncover new investment ventures, especially those involving companies not yet approved for listing on the exchange. These investors would thus be able to get in on the ground floor, before stock prices soared.

As B shares were being eagerly snapped up by foreign investors, Zhou Zhishi, Vice President of the Shanghai branch of the People’s Bank of China, left China for Hong Kong to discuss ways of publicly listing shares of Shanghai companies in the colony’s markets. Acknowledging that there were vast differences between the accounting methods used by Chinese Firms and generally accepted international practices, Zhou nonetheless expressed confidence upon returning to China that “some adaptation methods” would be worked out so Shanghai markets could be more closely integrated into the global finance system. No sooner had he spoken than a Chinese paint manufacturer made the Hong Kong grade and watched its B shares triple in value after the first day of trading. Although the B-share market cooled down somewhat by fall, during the week of October 5 another great leap forward occurred when a fully Chinese-owned company, Brilliance China Automotive Holdings—a manufacturer of minibuses that had been conveniently set up as a Bermuda holding company for tax and accounting reasons—passed muster and, with First Boston Corporation serving as lead manager and Merrill Lynch and Salomon Brothers as secondary underwriters, leapfrogged the B-share strategy by listing 5 million ordinary shares on Wall Street. No one doubted that it would not be long before other Chinese firms followed this trailblazer.

Marxist Laissez-Faire

As the summer of 1992 began, the Chinese government continued to formulate trading regulations while pushing forward its plans to develop a fully integrated and electronically linked securities trading system that would enable investors to trade from any city in China without having to rely on paper transactions.

During early August, government authorities allowed another 363 Chinese companies to issue shares experimentally—although they did not allow them to be traded on either of the new exchanges—thus raising the total number of officially approved shareholding companies in China to 3,683. “As a whole, the situation is good and the development trend healthy,” said a pleased Liu Hongru, Vice Minister of the State Commission for Restructuring the Economy. “However, some problems still remain.” It was quite an understatement.

When we asked Gao Xiqing what kind of problems Vice Minister Liu was referring to, he said, “Perhaps the biggest problem is that there are so many things that are being done unilaterally and chaotically in these regional financial markets. If the cities continue to ignore the central government or if there is much more trouble with these new exchanges, it could be very bad not only for the stock-buying public but for the country as a whole. If hard-liners become tempted to try to regain their grip by closing down the stock markets, who knows where it will lead the reform movement?”

The answer to this question was by no means clear, but during the spring and summer of 1992 almost every day brought more astounding news about China’s mad rush to transform itself from a centrally planned economy into a bastion of free-market enterprise. Amid this orgy of laissez-faire reforms it was easy to forget that China remained the world’s largest surviving Marxist-Leninist state, one that continued to uphold Mao’s dictatorship of the proletariat as a central component of its political philosophy. And in spite of the furor over China’s economic reform, Beijing had hardly uttered a single word about liberalizing China’s autocratic political system. Likewise, nothing had been said about ameliorating the country’s huge network of labor reform camps, in which hundreds of thousands of hapless political prisoners are still incarcerated. It is no small irony that some of the inmates held within these gruesome facilities were originally imprisoned for having supported the notion of freer markets and politics. China may have succeeded in breathing new vigor into its system of one-party rule by cloning capitalist institutions into its mutant system of socialism. While it seems probable that in the long run these institutions could help destroy the Communist Party’s grip on the Chinese government, in the short run they have had the paradoxical effect of strengthening the party and prolonging its survival. As a Chinese aphorism put it, they were “imbibing poison to cure the disease.” But for the moment, the political demise of the ancien régime hardly seems imminent.

The Center Doesn’t Hold

If stock markets and futures exchanges made a mockery of China’s depiction of itself as a Marxist-Leninist society, they also accelerated the process of regionalization that has been dividing the country into economic satrapies slowly drifting beyond Beijing’s control. This process of decentralization raises a question nobody wants to confront—at least not as long as everyone is making money. What would the central government, which after all still controls the military, do if one of these regions began to translate economic independence into political independence? With economics so dominating the agenda in the People’s Republic, it seems very possible that, as Gao Xiqing implied, the next major challenge to the Beijing regime might revolve around questions of regional economic autonomy rather than issues of freedom, democracy and human rights.

Indeed, only a week after Gao’s comments, a disturbance took place that made his words of warning seem prophetic. On August 8 rioting erupted in the city of Shenzhen as thousands of Chinese scrambled to get application forms for an upcoming stock-market lottery that would allow winners to purchase shares in the fourteen new companies that were due to be listed on the exchange in the coming months. Each of the 5 million lottery tickets cost 100 yuan ($20), and the receipts from their sale were purportedly being used to fund municipal “welfare” projects. Only 10 percent of those applying, however, would win chances to purchase shares in the new companies, whose names and balance sheets had still not been made public. Even though the actual sale of applications was not scheduled to begin until Sunday, August 9, on Friday people had already begun to line up at the 300 distribution centers. By Saturday tens of thousands were queued up in the suffocating summer heat. Some were barefoot peasants from distant provinces who had heard that people could get rich on the stock market. Others had come from faraway cities, bringing with them the identity cards of friends back home so they could buy application forms for them by proxy. There was such eagerness to get applications that some people bought places in line for as much as 2,000 yuan ($400), creating pushing and jostling that quickly led to unruliness. Gang fights broke out in some lines. By Sunday, a crowd waiting outside the local branch of the Bank of China grew so rowdy that officials were forced to barricade entrances with filing cabinets to keep from being overrun, and police moved in using electric cattle prods, bamboo canes and leather belts to restore order. “China’s capitalist revolution went mad with a deluge of people hoping for a chance to buy shares in the city’s stock exchange,” reported Hong Kong’s South China Morning Post.

By midday Sunday, there were more than half a million people waiting in line. Rumors raced through the crowd that police had purloined thousands of the eagerly sought forms and were selling them illegally on the black market at enormous profit.

When it was announced that all 5 million lottery tickets had been sold, the crowds went berserk. Some people marched to the Shenzhen Municipal Building, where they demanded to see Mayor Zheng Liangyu to secure a guarantee that the distribution of the applications had been carried out in a “fair, efficient and safe” manner. And to make matters worse, while the official Chinese media refused to report on the riots, Hong Kong television, which almost everyone in the Pearl River Delta watches, showed lurid shots of police savagely beating people; this incited the crowds even further.

The next day, when reports began circulating that two people had been killed in the rioting—an allegation that was promptly denied by the Chinese government and ultimately proved to be untrue—in spite of rain, angry crowds poured back into the street in an even more volatile mood than before. It did nothing to calm them when the head of Shenzhen’s 6,000-man police force, Liang Chianyi, denied that police had acted in an “uncivilized” manner. “The police had no choice but to control the unruly crowd,” Liang insisted. “If the same situation had happened in Hong Kong, the police there would also have faced the same problem.”

On Monday, August 10, huge crowds massed in front of the Shenzhen municipal offices again to accuse police not only of siphoning off many of the coveted applications for themselves but also of unnecessary violence. As demonstrators smashed windows and overturned and burned several vehicles, nervous police, backed up by antiriot vehicles mounted with machine guns, upped the ante by retaliating with high-pressure water hoses and tear gas, and even fired live shots into the air. More than a dozen people were reported injured in the confusion, with protesters waving placards and banners proclaiming such slogans as “Down With Corruption!” The scene was hauntingly reminiscent of the 1989 Tiananmen Square demonstrations that had, in no small part, also begun as a protest movement against government corruption and mismanagement of the economy.

Monday’s riots did not die down until government officials promised to distribute more application forms the next day. By then, however, the Shenzhen stock index had begun to plunge so rapidly that trading had to be stopped on the city’s exchange for what officials described as “technical” reasons. Some of the government’s early statements made it look as if the city might take the same kind of hard line against rioters that Deng Xiaoping had taken in Beijing three years earlier. “A small number of hooligans have exploited the lack of supply of stock application forms and some our shortcomings in the operation [of the lottery] to incite the public and cause trouble,” declared Shenzhen Mayor Zheng, who promised to deal severely with “those who have taken advantage of public sentiment to stir up turmoil.” And just as in Beijing three years earlier, foreign reporters—particularly those from Hong Kong—were quickly blamed as agents provocateurs for showing footage of the riots on television. Several were detained, had their film confiscated and were accused of having illegally entered China.

However, as the riots ended, officials seemed to catch themselves, and to think better of fanning the embers of dissatisfaction with inflammatory recriminations. Even Deng, who had been among the hard-liners calling for military action in 1989, now seemed to want to keep the government response well-tempered, and he insisted that authorities in Shenzhen deal with the crisis purely as a local matter. The last thing Deng wanted was to see the Shenzhen protest spark sympathy demonstrations elsewhere in China. After all, only seven months earlier he had held up Shenzhen as a national model and urged the Chinese to “resolute action” in their experimentation with stock markets. If anyone was responsible for what had happened, he was a prime candidate for blame.

Comes the Counterrevolution?

What reformers immediately feared, of course, was that conservatives would use the riots as an excuse to launch a counterattack against Deng’s accelerated changes. It was this fear, coupled with a concern that charges of police corruption and brutality might lead to even more protests, that finally seemed to make Shenzhen authorities moderate their tone and address the problems head-on rather than try to palm them off on “a small number of hooligans.”

Guangzhou Mayor Li Ziliu, who was eager to have a securities exchange in his own city, insisted that the riots did not constitute “chaos” but should be viewed more “like a baby learning to walk. It’s inevitable,” he said, “that he will fall.”

“We don’t deny that there are imperfections in the current sales method, since we are in fact very inexperienced,” Shenzhen’s Mayor Zheng admitted on August 13 as he quite pointedly trooped off to Honghui Hospital to visit some of those who had been injured during the rioting. “We have made you go through all this because we did not do well in our work,” he said contritely. “We are sorry about you, and express our apology.”

Guangzhou Radio also seemed to bend over backward to calm public passions. “The phenomenon of fraud did happen at some stations selling tickets,” an announcer admitted during an August 22 broadcast. “Some Public Security cadres and policemen were not civilized enough in behavior while performing their duties. Since yesterday afternoon the city has paid great attention to the mass complaints and has organized a special force to conduct an investigation. Should fraud be discovered, such cases will be dealt with resolutely.”

Such contrition was in marked contrast to the central government’s militant denial of all responsibility when the 1989 protest movement in the capital ended in a massacre.

Future Shocks?

Even though there was no massacre in Shenzhen, the August riots were a vivid reminder that economic reform can bring unrest that is as difficult to control as political protest.

When Deng visited Shenzhen this past January, he had promised that if the practice of opening financial markets “proves correct,” it could be “spread across the board.” As a caveat, he had also said that “if anything goes wrong,” such markets could “either be corrected, or closed.” But then as a kind of afterthought he had added, “There is nothing to be feared. With such an attitude, we will make no big mistakes.”

But there was plenty to be feared. The Shenzhen riots gave a hint of how ill equipped China is to deal with the consequences of the reckless pace of economic reform that Deng has unleashed. China’s new stock exchanges may have appeared to most Chinese to be providential cash cows that can be milked endlessly by investors and factory managers alike. In fact, they are delicately balanced markets capable of sending devastating shock waves throughout the Chinese economy if not managed correctly. It came as something of a surprise to the Chinese when, shortly after the August riots, the stock markets began to go into a nose dive. No one knew what was causing it, but as Ren Kan, who writes a weekly market analysis in China Daily, said of the suddenly bearish market, “Although it’s still autumn, China’s two securities markets are making investors feel winter’s freezing cold.” By November the Shenzhen index had plunged to just a little bit above 100, down from its May high of almost 300, while the Shanghai index was hovering around 500, down from its May high of over 1,200. To those who were paying attention, it was a reminder that what goes up can also come down, and sometimes have unforeseen and sudden consequences.

Deng Xiaoping may have imagined that, by accelerating the process of economic liberalization while slowing political reform, China would have a better chance of remaining stable. But as Mao Zedong pointed out more than sixty years ago, “a single spark can light a prairie fire,” and it is not difficult to imagine that China’s young stock markets and the riots they produced might someday ignite a larger political conflagration.

The danger for China is that the country still does not have a political system capable of reliably mediating such periods of crisis. The Chinese government is a faction-ridden snake pit of warring party leaders who range from neo-Maoist hardliners to Westernized liberals. In the absence of a stable political system, and a legal system that cannot be overridden by political considerations, resolution of conflict depends almost entirely on a “big leader,” in this case Deng Xiaoping, now 88. But the experience of China’s financial markets suggests how volatile the country’s burgeoning market economy is. The riots in Shenzhen served as a warning that when upheaval next comes to China, it may be precipitated not by students and intellectuals demanding more democracy and human rights but by ordinary Chinese who feel insecure about their stake in the country’s strangely eclectic economy, with its roller-coaster highs and lows. The chaotic development of China’s stock market is also a warning that future upheaval may not begin In Beijing but in the provinces, where the extraordinary growth of the market is creating patterns of regional power that can be highly centrifugal.