Wall Street at Great Wall--Looking for Creative Balance

On Nov. 10 the People’s Bank of China welcomed a New York Stock Exchange delegation representing 15 of Wall Street’s leading banks, brokerage houses and law firms. Thus began a four-day symposium on the U.S. securities trading system for 250 bankers, economists and administrators from all parts of China.

A debate had been raging in China over the benefits and the dangers of securities markets. Three points of view emerged. The “purist socialists” regarded stocks as a “capitalist instrument” allowing people to earn profits without working. The “liberal reformers” contended that stocks pool idle funds and that freely trading stocks will mobilize even more capital. The “cautious reformers,” fearing the loss of central control, preferred to see stocks develop slowly within a strict regulatory system.

Of course, it was not part of the mission of the New York Stock Exchange delegation to influence this debate over securities markets. Our task was to explain the securities exchanges, not to promote them. But freedom to invest is inseparable from other forms of freedom.

Before risking his money in a “security,” the farmer who has accumulated substantial savings will want to know that he has a realistic chance to make a profit, that someone else will be ready to buy the security whenever he wants to sell it, and that the price he pays fairly reflects the security’s value.

The farmer cannot have these assurances unless prices of securities are based on the issuers’ profitability, and this cannot be measured unless the prices that the issuer pays for what goes into its products and the prices that it receives for them are both subject to market forces. To maximize profitability, managers must be allowed to reward employees who perform well and discipline those who do not. It must be accepted that the opportunity for profitability goes hand in hand with the freedom to fail.

Recognizing these realities, in 1984 the Central Committee of the Communist Party announced goals for a high degree of decentralized management and the achievement of a rational pricing system. It also declared that “equalitarian thinking is a serious obstacle to implementing the principle of distribution according to work . . . . Only when some regions, enterprises and individuals are allowed and encouraged to get better off first through diligent work can there be a strong attraction and inspiration to the majority of the people.”

By the time Wall Street came to the Great Wall, economic reform had generated substantial momentum. A system under which workers are hired through public recruitment and examination and work under a renewable contract had just been extended to all new workers at state enterprises. The contracts of unneeded workers do not have to be renewed, and workers can be dismissed for such things as “having a poor attitude to service” or “quarreling with customers.” Two weeks later a trial bankruptcy law for publicly owned enterprises was adopted by the Standing Committee of the National People’s Congress, but its effective date has since been deferred.

Individual enterprises had recently begun to raise capital through the sale of securities to the public. A “stock exchange” opened in Shenyang, the capital city of Liaoning province, last August. In Shanghai, where in 1950 the People’s Liberation Army shut down the old stock exchange, a new exchange was launched last September.

It is now apparent that these developments were bound to awaken political demands. In retrospect, our dispassionate description of secondary securities markets looks positively incendiary.

China’s leaders have long been aware of the link between economic and political reform. They also know that keeping both moving forward in tandem is a formidable challenge. Meeting with the New York Stock Exchange delegation after the symposium, Deng Xiaoping outlined three key components of his strategy for meeting this challenge.

The first component is the people’s awareness that their well-being has improved as a result of the “open policy”; if in the future there are those who want to change this policy, “the people won’t support those persons.” The second is giving leadership roles to younger people who understand that continued economic growth requires exposing the economy to internal and external competition. Third, and even more crucial, is harnessing reform to a vision of the future in which Chinese per-capita income will have quadrupled by the year 2000 and quadrupled again by 2030.

Deng added: “We are also engaged in political reform. The first priority for political reform is to maintain the vitality and vigor of the party and the country.”

What this implies is that political reform must not be allowed to arouse concerted party opposition. If economic reform is too rapid, the political demands that it encourages will inevitably provoke a conservative reaction. But if economic reform is not rapid enough, the popular support that it needs in order to overcome entrenched resistance will diminish.

For decades to come the unremitting task--and test--of Chinese leadership will be to maintain a creative balance between the economic yin and the political yang. Wall Street will watch this effort with fascination and hope.