A phone call from my aunt made me realize how the Chinese stock market, albeit immature and irrational, is pushing forward the world's fastest-growing economy.
``You must have heard the market stumble today, so I sold my stocks online in the early afternoon before they shrunk further. It's such a pity, you know, I'd had 100 percent return as of last night,'' said my aunt, who four months ago did not know how to use the Internet. And, although she called it a pity, she still managed to gain 40 percent from those stocks she'd been holding for three weeks.
It is no surprise that China's household bank savings dipped $21 billion in April and by $37 billion in May, marking the largest drop in history, according to the People's Bank of China. Cash has been flowing out of savings accounts and into the bullish stock market.
The stock-market bubble eventually will burst, wiping out many formerly prodigious savers' lifetime savings, and leaving those who spend bank loans on day trading desperate. No doubt it will teach a lesson that financial speculation produces no fundamental benefit for the economy.
Nevertheless, I believe the equities fever is a remarkable step along the development path for Chinese enterprises. It works from the bottom up, giving novice investors a jump-start in financial principles and know-how, calling more attention to the operation of public companies, and forcing firms to commit to better transparency of corporate affairs.
The business arena lacks transparency in China. State-owned enterprises still live in the tradition of feeding the public a communist-style term called ``propaganda material,'' only when they want to. Private companies, many started as family businesses, can be extremely low-profile and even secretive.
The lack of transparency often hides poor financial management. SOEs tend to focus on sales, not profit. Pretty sales numbers, implying the creation of jobs, are important for SOE officials' promotion. As for the private companies, many business owners have told me, ``numbers are just a game'' - not only to mom-and-pop tool shops, but also to factories employing thousands of workers.
But the allure of raising money from the sizzling stock market is difficult to resist, especially as China's banks, in a wave of going public, too, tighten credit to try to improve their own financial performance. Both SOEs and private companies are actively trying to participate in the stock market.
A great example is China National BlueStar (Group) Corp., a state-owned chemical and engineering resin maker. The Beijing-based company claims to be a market leader and is the major shareholder of three public companies listed on the Shenzhen and Shanghai stock exchanges: BlueStar New Chemical Material Co. Ltd., BlueStar Cleaning Co. Ltd. and BlueStar Petrochemical Co. Ltd.
But BlueStar Group has been having a hard time launching an initial public offering for itself in Hong Kong. Chinese media cited the company's financial situation as the roadblock. That's when it caught the attention of the Greater China operation of New York-based Blackstone Group, headed by former Hong Kong Financial Secretary Anthony Leung.
Whether BlueStar ends up going public or being acquired by Blackstone, or neither, its financial viability has been brought into focus and, I hope, to the top of its working agenda.
Another SOE plastics company in which Blackstone expressed interest earlier this year was Anhui Guofeng Group Co. Ltd., one of China's 10 largest plastics processors, according to data from Beijing's China Plastics Processing Industry Association. Guofeng makes biaxially oriented polypropylene film, pipe, profiles and other products. Guofeng Group holds more than 60 percent of the shares in its subsidiary Guofeng Plastics, which has been listed on the Shenzhen Stock Exchange since 1998.
Similarly structured Hebei Baoshuo Group Co. Ltd., which also topped China's 10 largest processors' list in 2005, declared bankruptcy earlier this year. Baoshuo's Web site said the group employed nearly 10,000 people. Affected by the long-dragged-out bankruptcy, its publicly listed subsidiary Hebei Baoshuo Co. Ltd. has been downgraded to a ``special treatment'' stock, defined as stocks with financial difficulty and high risk.
Market-disturbing news also came from Shen Ma Industry Co. Ltd., a publicly listed subsidiary of state-owned Shenma Group Co. Ltd., China's largest nylon 6/6 resin producer. According to the Shanghai Securities News, after the disclosure of an unexplained ``huge amount of money missing,'' Shen Ma Industry replaced its chairman and financial director on June 26.
The investment surge is stirring the pot in the Chinese economy. Many wonder when the government will take hard measures to prick the bubble. But, for manufacturing companies, it is the raised awareness of sound financial practices and the actual sifting effect on existing public firms and wanna-be-public firms that merits our applause.
Nina Ying Sun is a Plastics News staff reporter and Asia specialist based in Akron, Ohio.