AFTER
decades of cradle-to-grave welfare with meager salaries allowing a minimum choice of consumer goods and no investment, people in Shenzhen greeted the newly created stock market in the late 1980s with a fever.
Even before the Shenzhen Stock Exchange began operating in late 1990, residents traded the stock of a small number of companies in backstreets near Hongli Road, virtually in the same way as today’s street peddlers sell fruit and vegetables. The prices surged as a growing number of residents pursued a small number of stocks. The soaring prices in turn attracted more people who had never thought of buying these “pieces of paper” that could boom — or bust.
Several years earlier, a company in Shenzhen which issued the country’s first stock certificates since 1949 met an apathetic public that knew nothing of stocks and investment.
First stock after 1949
The establishment of the Shenzhen Special Economic Zone and the subsequent relocation of Bao’an County led to the incorporation in 1983 of the Bao’an County United Investment Co., now known as the China Bao’an Group, as the country’s first joint stock company since 1949.
The county seat relocation to Xin’an Township needed a lot of money. Inspired by the stock market in Hong Kong, Fang Bao, county Party chief, and Li Guangzhen, county governor, decided to raise funds from the public to establish the Bao’an County United Investment Co.
“Although some people had become rich by starting business ventures, the plan to attract investors met with skepticism and few would risk their hard-earned money by investing in uncertainties,” Chen Zhengli, chairman of the China Bao’an Group, said of the initial response in a Daily Sunshine report last month.
To show confidence, the county fiscal bureau invested 2 million yuan for 20 percent of the company, leaving 8 million yuan in shares to be offered to the public. The company sweetened the share offer, allowing investors to withdraw and promising to repay principal and interest on demand.
Company staff were all out on foot or by bike to seek investors. “When someone called to subscribe even for just one share, which was priced at 10 yuan, we would cycle to his home to deliver the stock certificate,” Chen said.
The company also published a prospectus in the Shenzhen Special Zone Daily in a bid to attract investors nationwide. The initial public offering (IPO) helped the company raise 13 million yuan. However, the firm did not generate investment zeal until 1991 when it was listed on the Shenzhen bourse.
Creation of the stock market
As economic reform unfolded, the Shenzhen city government was confronted with the mammoth task of reviving the ailing State-owned enterprises. It issued new rules on corporate restructuring Oct. 15, 1986, paving the way for State firms to be transformed into joint stock companies.
In 1987, the Shenzhen Development Bank was founded as the country’s first joint stock financial institute, based on the merger of six credit cooperatives. In the following year, the bank began to be traded over the counter at the Shenzhen Special Zone Securities Co., becoming the first publicly traded firm since 1949. This prompted a visit to Shenzhen by Nobel Prize-winning economist Milton Friedman, who warned novice investors here that the stock market could be a Pandora’s box.
Vanke, Jintian, Anda and Yuanye followed the bank in issuing IPOs. Before the Shenzhen Stock Exchange opened, the only five stocks in Shenzhen were traded in three brokerage houses and on the black market in the backstreets of Yuanling.
However, the lack of market infrastructure did not prevent a spectacular bull run. Between May 25 and June 27, 1990, Shenzhen Development Bank doubled, Vanke soared 380 percent, Yuanye surged 210 percent, Jintian rose 140 percent and Anda 380 percent, triggering calls from the leftists to close the “capitalist” stock market.
Some officials who had been required by the government to subscribe to the bank’s shares to ensure a successful IPO, unwittingly became rich after the price rose to 80 yuan in 1990 from the IPO cost of 2 yuan.
One official who was unnerved by the unexpected windfall, then worth more than 100,000 yuan, handed his stocks over to corruption investigators because he was not sure whether he owned the fortune legally.
The stock market began to be known as a factory that produced millionaires, attracting investors from other mainland cities and even Hong Kong.
Amid controversy surrounding the burgeoning market, then mayor Li Hao ordered the Shenzhen Stock Exchange to open Dec. 1, 1990 “on a trial basis” without Central Government approval.
Aug. 10 unrest
Friedman’s warning soon materialized. A mania to subscribe for IPOs grabbed Shenzhen in 1992, leading to social unrest.
Ahead of planned IPOs by several companies, the city government decided to use raffles to allocate shares as oversubscription was inevitable given overwhelming public enthusiasm. It announced Aug. 7, 1992 that 5 million subscription forms would be sold at 303 outlets, mostly banks, across the city at 10 yuan each. An ID card was required for a maximum of 10 forms, which would carry a 10 percent success rate.
This attracted 1.5 million people from across the country to join the “gold rush.” Fares for long-distance buses bound for Shenzhen quadrupled, and city postmen struggled to deliver parcels containing ID cards from other parts of the country. One such parcel weighed 17.5 kg. “Eight hundred ID cards weigh a kilo. You can see how many ID cards this parcel carried,” a post office worker was quoted by journalist Xu Mingtian as saying in his new book, “The Story of Spring.”
Eager potential investors lined up in front of the outlets two days before schedule. On Aug. 8, hundreds of thousands of people packed the doorsteps of the 303 outlets like sardines. In order to prevent the queues from being blown out by an outpouring of newcomers, those in the queues, men or women, held on to the waists one after the other. At dusk, 1 million people were already in the queues. The government had to deploy police and troops to keep order.
In the long hours, few would risk losing their place by going to the toilet. At night, under the cover of darkness, many relieved themselves using newspapers, lunchboxes and mineral water bottles. “The city smelled,” Xu wrote.
A photograph published in the Shekou News showed a sweating young man from Jiangxi Province yelling at the camera: “I’ve queued for two days!” after being forced out of the queue just 30 minutes before the outlet opened. He was seen desperately holding his ID card and banknotes drenched with sweat.
Within two hours after the outlets opened, 5 million subscription forms were snapped up. Tens of thousands of people who failed to get forms took to the streets, protesting that officials and bank staff had secretly taken the forms before the outlets had even opened. They vented their anger by smashing shops and torching police cars. To assuage public outrage, the city government announced early Aug. 11 that 500,000 additional forms would be issued. In a rare move, Zheng Liangyu, then mayor of Shenzhen, appeared on television to appeal for calm.
An ensuing investigation found at least 44 percent of the IPO forms were purchased secretly by officials and bank staff, Xu wrote. The scandal and fears that the additional IPOs would open floodgates to a glut of new stocks triggered a market crash, with the Shenzhen Component Index shedding almost 1,400 points in three months after peaking at 2,918 Aug. 10.
The unrest also forced Zheng to leave Shenzhen. He later became vice governor of Jiangxi, Xu wrote. Two months after the unrest, the market watchdog, China Securities Supervisory Commission, was created.
The 1992 IPO mania was dubbed “growing pains” for the fledging stock market, which has become an important part of the national economy despite the turbulent roller-coaster rides in its 18-year history.
(Lin Min)
