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Admire John McPhee, Bill Bryson, David Remnick, Thomas Merton, Richard Rohr and James Martin (and most open and curious minds)

1.12.14

China

Red Capitalism by Carl E. Walter and Fraser J.T. Howie. In 1978, the entire city of Beijing was barely able to scrape together $38,000 to send their leader Deng Xiaoping to the United Nations. Today, China's stock markets are the largest in Asia:

"30 years ago China was barely able to pull itself up off the floor where it had been knocked flat by the Cultural Revolution. Beijing in 1978 was a fully depreciated version of the city in 1949 minus the great city walls, which had all been torn down and turned into workers' shanties and bomb shelters. 

"Deng Xiaoping, during his first, brief, political resurrection in 1974, led a large Chinese delegation to a special session of the United Nations. This was a huge step for China in lifting the self-imposed isolation that prevailed during the Cultural Revolution. Just before departing for New York, the entire central government, so the story goes, made a frantic search through all the banks in Beijing for funds to pay for the trip. The cupboard was bare: they could scrape together only US$38,000. This was to be the first time a supreme leader of China, virtually the Last Emperor, had visited America; if he couldn't afford first-class international travel, just where was the money to support China's economic development to come from?

"[Now] China's stock markets are the biggest in Asia, with many of the world's largest companies, and more than 120 million separate accounts trading stocks in nearly 1,800 companies. Their capital-raising abilities are the stuff of legend (see Table 6.1). According to data from Bloomberg, since January 2006, half of the world's top 10 IPOs were chinese companies raising over US$45 billion. It is not uncommon for new issues in Shanghai to be 500 times oversubscribed, with more than US$400 billion pledged for a single offering. The scale of China's companies since 1990 has increased exponentially. In 1996, the total market capitalization of the top 10 listed companies in Shanghai was US$17.9 billion. By year-end 1999, this was US$25.3 billion and, ten years later, $1.063 trillion! Like everything else about China, the simple scale of these offerings and the growth they represent at times seems staggering. ...

"In the 1980s, China's stock markets arose for the same reasons as stock markets in Western private economies: small, private, and state-owned companies were starved of capital and small household investors were seeking a return. The idea of using shares to raise money sprang up simultaneously in many parts of the country and, given the relaxed political atmosphere of the times, the ideas were allowed to take shape. ... The key year was 1987, when five Shenzhen [state owned enterprises] offered shares to the public. Shenzhen Development Bank (SDB), China's first financial institution (and first major SOE) limited by shares, led off in May and was followed in December by Yanke, now a leading property developer. Their IPOs were undersubscribed and drew no interest. The retail public's indifference to SDB 's IPO even forced the Party organization in Shenzhen to mobilize its members to buy shares. Despite this support, only 50 percent of its issue was subscribed.

"The fact is that after more than 30 years of central planning, near-civil war and state ownership, the understanding of what exactly an equity share was had been lost in the mists of pre-revolution history. Where securities called 'shares' existed, investors thought of them as valuable only for the dividends paid; people bought them to hold for the cash flow. There was no awareness that shares might appreciate (or depreciate) in value, and so yield up a capital gain (or loss). So the market was understandably tepid for the bank's IPO and it was also unprepared for events that followed payment of the first dividend in early 1989.

"The SDB's dividend announcement in early 1989 marked a major turning point in China's economic history, and it should be recognized as such. The bank was very generous, awarding its shareholders -- largely state and Party investors -- a cash dividend of RMB10 per share and a two-for-one stock dividend. In the blink of an eye, those who had bought the bank's shares in 1988 for about RMB20 enjoyed a profit several times their original investment. ... People got the point: shares were worth something more than simple face value. As this news spread in Shenzhen, a fire began to blaze. the bank's shares, as well as the few other stocks available, skyrocketed in wild street trading. SDB's shares jumped from a year-end price of RMB40 to RMB120 just before June 4, 1989, and despite the political trouble up north, ended the year at RMB90.

"Armed with this new insight, China's retail investors set off a period of share fever, centering on Shenzhen and gradually extending to Shanghai and other cities such as Chengdu, Wuhan, and Shenyang, where shares were traded. In the end, Beijing forced local governments to take steps to cool things down. Restrictions eventually took hold, leading to a market collapse in late 1990. Even so, investors had learned the lesson of equity investing: stocks can appreciate."


Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise
Author: Carl Walter
Publisher: John Wiley & Sons Singapore Pte. Ltd.

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