Editor’s Note: Wang Zhaojun is a standing member of the Anhui Province Political Consultative Commission. He wrote this open letter on October 22.
Greetings, Honorable President Hu Jintao and Premier Wen Jiaobao!
I am a standing member of the Anhui Province Political Consultative Commission. My name is Wang Zhaojun.
The Chinese Communist Party’s 17th National Congress has been brought to a close. Your leadership position is further consolidated and you now should have the energy and capability to implement your policies. Therefore, I have decided to write you this open letter, which is titled “Strategies for a Harmonious Society.”
President Hu, immediately after taking office you proposed your political guideline of “Constructing a Harmonious Society” and the “Concept of Scientific Development” which emphasized that “people shall be the fundamental foundation of everything”. These proposals were widely praised both at home and abroad because they indeed addressed the key problems in China. However, a long time has passed, the situation in China has not become any better or moved any closer to the guidelines of your proposals; on the contrary, things have become much worse in many respects.
There is certainly hearsay evidence of your being restrained from exercising your political powers. For example, there is a saying: “The orders issued by the new leaders simply vanish before they get out of Zhongnanhai.”[1] However, with the conclusion of the 17th National Congress, you should begin to solidly implement your political goals and show your true colors in any way possible. Some may say: “President Hu and Premier Wen have already started to do so, as shown by the public announcements, resolutions, and documents from the Communist Party’s 17th National Congress.”
Nonetheless, we have learned from the history of the international communist movement, especially the Chinese Communist Party’s history, that the resolutions and documents from all National Congresses are products of compromise and reconciliation. The divergent stories after each Congress are simply too numerous to enumerate.
The Chinese people have lived through your first term in anxious expectation. We should not allow the same situation to repeat itself in your second term; China’s reality does not allow you to spend your second term in the same manner.
A Pair of Cluster Bombs in China’s Society
It is no exaggeration to say that there are numerous hidden bombs in China’s society. Some you may leave unattended until after your second term, but there are some you cannot afford to circumvent and have to face right now.
A. The First Bomb for China – The Stock Market
The current Chinese stock market is like “The Emperor’s New Clothes”. Almost everyone is aware of the gigantic “bubble” crisis inherent in today’s stock market, yet the stock values are still increasing like crazy. It happens because the media are still touting that “it is a great accomplishment of the ’reform and open-up' policy. We are witnessing a once-in-a-century big bull market.” Of course, it is mainly because you hope it is a big bull market, as do ordinary citizens. However, the reality will turn out to be a big joke for all of us
Today’s stock market in China is no longer the market of two years ago, before the “stock reform.”
China’s stock market was initiated in the 1990’s. From the very beginning, the stock market has been under the control of the state to raise funds for state-run enterprises and to help with their reforms. At first, it was just a small-scale initial try with many ups and downs as well as behind-the-scene operations. Due to its size, many years of a bear market would not constitute any threat to social and political stability, even if the market fell all the way to the bottom.
Now things have completely changed. Since the second half of 2006, the stock market has kept skyrocketing all the way from 3.3 trillion yuan to 18 trillion yuan as of May 30, 2007. Now, there are more than one hundred million people involved in stock trading. Just before I completed this letter, the stock value increased by another 50 percent in less than half a year. That being the case, in terms of the role of the stock market in China’s economy and the influence of Chinese stockholders, the change can well shake the entire society. Actually, China’s stock market is not a big bull market, but rather a big gamble. Let me list the reasons for this below:
(1) China’s Stock Market is Weak at Birth
As a matter of fact, the so-called “stock reform” is as of today nothing but a concept. The “reform”, at the very most, simply converts reserved stocks to exchangeable stocks, but it has zero impact on the company’s internal reform.
As a result, the companies that are publicly traded on the stock market continue to operate like state-run companies with no differentiation between politics and business or between the Party and administration.
Publicly traded companies are even worse off than state-run enterprises because the leaders hold both the reserve stock shares—which help them maintain their leadership positions—and the exchangeable stocks that add to their wealth. This unique (preferential) status has become their unmatched privilege.
What about China Securities Regulatory Commission (CSRC)? As the plenipotentiary minister of the government, the CSRC resells those stocks at overly inflated values to the secondary market after inspecting the stock performance. The CSRC is thus creating the bubble artificially. Monopoly, corruption, undue management, and the series of problems from the upper level to the lower level, are the root problems in China’s stock market.
(2) China’s Economy “Sick at Birth”
Why was a huge amount of money suddenly transferred away from banks as soon as the message of “stock reform” came out? Initially, the CSRC was worried that the “reform” could well be a short-lived one due to lack of funds. As a result, some people decided to sell state-owned stocks to foreign investment banks at below market value. Unexpectedly, there was a wild influx of funds into the stock market. Investors indeed failed to predict how anxious people were to take money out of banks; the withdrawal of money was just like popcorn jumping out of an over-heated wok. Why? It was because simply putting money in the bank has no benefit; money merely depreciates in value in a bank savings account. It does not mean that China’s economy is doing great and that there is a surplus of capital. The root cause of the “bubble” is that there is no other way for the investment to have any meaningful return other than from trading stocks. China’s economy has been sick since its birth, and the sickness is quite severe.
(3) A Big Gamble
The stock market, characterized by its partially analyzable and partially mysterious features, balances all kinds of unpredictable economic risks in a society. If all its mysteries could be seen through—particularly behind-the-scenes factors—it would be the source of a “once-in-a-century big bull market” eruption.
It is a well-known fact that China’s stock market is a political market, a policy market.
Because the Chinese Communist Party (CCP) is always “great, glorious, and correct”, and always gives prominence to politics, the CCP is bearing all the risks of China’s stock market in order to secure the CCP’s 17th National Congress, and to ensure a grand and showy Olympics.
There is not a single state leadership in the whole world willing to trap itself in the stock market. However, the CCP grips the stock market and won’t let go, thus attaching a bomb to itself. It is indeed very unwise.
Of course, you can continue to cover up the stock crisis and hope to circumvent it with a series of action plans. For instance the ongoing integration of Hong Kong Red Chips into the inland market; reorganization of the large state-run enterprises under the jurisdiction of the state-owned Assets Supervision and Administration Commission of the State Council and putting them in the stock market; accelerating initial public offerings of civil high-tech enterprises; allowing Qualified Domestic Institutional Investors (QDII) to invest in overseas markets; having the Central Bank increase the interest rate and lowering taxes, increasing bank reserves, issuing special treasuries, and so on and so forth.
I cannot comment on the actual effect of these actions; however, there is one thing I can declare with assurance: there is no way you can manipulate and alter the laws of economics.
B. The Second Bomb for China—Commodity Prices
As China’s stock market continues to be the gamble-like “bull market”, China’s commodity prices keep rising uncontrollably, to an unbearable point for the Chinese people.
The stock market and commodity prices form two social bombs—they are a pair of cluster bombs that none of us, including yourself, can manage to avoid.
Needless to say, in addition to a rising stock market, there are other factors contributing to the increase in commodity prices. All these factors could well bring a disaster equally terrible, if not worse, such as a big collapse of the stock market.
Here is the strategy I would like to propose to you:
Now that the 17th Congress, during which you have achieved your political goals and secured your power, has come to an end, I suggest that from now on the state gradually separate itself from the stock market. The stock bubble could burst at any time. Separation from the stock market right now would be better than maintaining the current status until the “bubble” finally bursts. If we do nothing about it at the moment, stockholders will have certain gain for some time, but the loss in the end will be a lot more tragic, with a greater number of stockholders suffering. The resentment from people would be even greater. Chinese leaders should poke the “bubble” as soon as possible, and try to do this in a moderate, controlled manner.
It is indeed very difficult. It is very difficult to avoid causing instability of the stock market and to society. Yet it is not the fault of the current leaders; there are historical reasons at play. Thus, it needs to be explained and clarified to all Chinese people that the bursting of the “bubble” of the “big bull market” is an inevitable event that will hit us sooner or later. Chinese leaders should take this opportunity as a turning point to initiate an all-round reform in the stock market, in finance, and even in China’s economic and political reforms.
If you explain all this clearly to the Chinese people and launch a series of reform objectives and plans, our people will be understanding and forgiving.
The burst of the stock market “bubble” will provide you the best opportunity to start an all-inclusive reform in China, especially political reform. It is indeed an excellent test of your resoluteness and talent as political leaders.
However, if when the bubble bursts you do not initiate the reforms and only intend to cover up your responsibility by means of propaganda, it is easy to imagine what a huge crisis China will face at that time.
[1] http://en.wikipedia.org/wiki/Zhongnanhai
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