SUN WUKONG
How bourses bring democracy to China
By Wu Zhong, China Editor

HONG KONG - While the 2,000-plus Communist Party deputies convene at the 17th National Congress in Beijing, more and more ordinary Chinese citizens are joining the huge army of speculators and investors to trade shares in hope of sharing the wealth generated by the booming stock market.

These two seemingly unrelated events, one very politically choreographed and the other purely money oriented, are in fact related.

On the business side, the 17th Party Congress will set policy principles for the country's economic development in the next five years which definitely will affect the stock market both in the short and long run.

On the other hand, the total capitalization of China's stock market now exceeds the its gross domestic product (GDP) and this plays an increasingly important role in the country's economic development, which the Communist Party's policy makers now must take into consideration. And since so many people are now involved in the stock market, party leaders cannot ignore their interests when they formulate relevant policies - if President Hu Jintao's "people first" principle is to be upheld.

On the political side, the development of the stock market is bound to have an influence on political development in China. There is now a view that by participating in activities on the stock market, the masses are having a baptism in democracy. The stock market's nature (excluding those illegal irregular activities) is essentially democratic, with every investor treated equally. Everyone holds his own views and makes his own decisions. And the movement of the market is decided by the majority, which a dissenting individual must accept. Furthermore, small shareholders can freely express their views in general meetings and cast votes.

Indeed, the "training" in democracy that the massive number of Chinese stock investors are receiving could enhance the country's possible democratization in future. While the Communist Party is unlikely to give up its rule in the foreseeable future in favor of a multi-party democracy, it has inevitably to develop democracy within the party.

The number of Chinese citizens involving in stock trading could be more than the 73.36 million Communist Party members as of the end of June. And in the past 10 years, the party has attracted more and more "red capitalists" as members. Among current stock investors and speculators alike, there are also many party members and government officials. Sooner or later, they will speak out and make efforts to safeguard their interests.

In general, the Chinese Communist Party is no longer the "vanguard of the proletariat" but an "all-people" party, in that its members are representatives of various social strata. Hence there will be different views and orientations and party policies that will have to be resolved through democratic procedures.

The fast expansion of the stock market over past two years contributes to such potential changes in China's politics.

On December 19, 1990, the Shanghai Stock Exchange opened, followed a couple of months later by the Shenzhen Stock Exchange started. After 15 years of growth, gross capitalization of the two exchanges totaled 3 trillion yuan (US$400 million) by end of July, 2005.

But from mid-2005, the Chinese stock market began to explode geometrically, so much so that by end of last month, gross capitalization of the Shanghai and the Shenzhen stock exchanges reached 25.32 trillion yuan - about eight times more than two years ago.

According to data from the National Bureau of Statistics, China's GDP totaled 21.09 trillion yuan. With an estimated annual growth of 11.5%, China's GDP will reach 23.52 trillion yuan this year.

This means China's securitization rate (gross capitalization of a country's stock market over its GDP) exceeded 100% for the first time this year. By the end of last month, the securitization rate was 120% compared with 2006 GDP and 108% of its estimated GDP in 2007.

Some excited Chinese analysts feel proud that it took less than one year for China to raise its securitization level from 50% to 100%, while by comparison it took 7 and 4 years for the United States and South Korea, respectively, to complete the process.

Oner reason for China's rapid securitization is the massive number of investors, and their large amount of savings. By end of August, the number of stock investor accounts in the two bourses reached nearly 118.7 million, according to official statistics.

A certain number of the investor accounts are held by institutions. Some individual investors may also have opened two accounts - one with the Shanghai bourse and another with the Shenzhen exchange. Making allowances for these two factors, it is probably safe to say that individual investors could number between 50 million and 100 million. They are aged 18 or older and the vast majority of them are city residents. Suppose a core family in China has 3 members, then some 150 million to 300 million urban residents are exposed to the "democratic game" of the stock market.

No doubt, their mentality, life style and living standard are influenced by such exposure. One small investor wrote on the Internet: "In the stock market, I experience freedom, rule of law and democracy." Another said: "I have gained self-confidence. I make my decisions on my own, no longer having to give a damn for any empty official talk."

And indeed, small shareholders enjoy real freedom of speech in general meetings of listed companies. There are even examples of small shareholders uniting to veto management decisions.

Such experiences are bound to have an impact on China's future political development.

As expected, at the 17th Congress Hu ruled out political democratization while he called for "the restructuring of the political system" in his keynote address on Monday. "Political reform must follow correct political orientation, with the goal to strengthen the vitality of the party and state ˇ*" he said.

In other words, in the next five years under Hu's dictates, "political reform" will be used to consolidate the Communist Party's rule instead of weakening it.

Nevertheless, Hu called for expanding democracy within the party to promote direct elections for party leadership positions at the grassroots. His words indicate that democratization within the party is becoming inevitable, though like the country's economic reforms, such democratization would be long and gradual.

The day when ordinary Communist Party members begin to demand to have their say in party affairs, there will be genuine democracy within the party. The day when the majority of ordinary Chinese citizens begin to demand to have their say in state affairs, there will be democratization in this ancient Middle Kingdom. But there may be a long wait between the two processes.

Dr Wu Zhong is China Editor of Asia Times Online.