Uncertain future for China's bourses

By Wang Dan

Fluctuations in the stock market are normal, but following the China Venture Capital stock manipulation case in 2000 and, in particular, after the plan for the costly reduction in state-held shares was revealed in 2001, the securities markets in Shanghai and Shenzhen have fallen and do not seem likely to rebound.

Even though the reduction in state-held shares since has been forced to stop, the corrupt practices of the securities markets and the fact that the government is using the stock markets to rob the people of their wealth has been fully revealed.

Just like most of the Chinese Communist Party's policies, the stock markets lacked democratic decision-making when they were first introduced. The late Deng Xiaoping rashly treated such an important matter as an experiment, saying that if it worked, then it could continue, but if it did not, it could be discontinued at any time.

In order to protect the party's absolute control of the social economy, party institutions and the state hold the largest share of the stock in listed companies while local governments compete with each other to falsify accounts and lie in order to have local companies listed on the stock exchanges, treating these substandard, so-called joint-stock companies as money trees.

In such listed companies, there are no guarantees for the interests of medium and small investors. Media control and an unfair legal system block investors from obtaining correct and timely information, and they are also unable to effectively protect themselves once their interests are violated. The behavior of listed enterprises which, according to public data, enjoy substantial profits but are refusing to pay dividends to shareholders are protected by the Securities Regulatory Commission. This causes stock markets to provide only speculative and no investment value.

After former premier Zhu Rongji came to power, the promotion of the idea that the stock markets should assist the reform of state-owned enterprises in order to maintain so-called stability was actually a policy aimed at plugging the black hole in state-run enterprises. Zhu gave tacit approval to and even permitted market insiders to do as they pleased by using People's Daily editorial space to encourage the irrational growth of the stock markets.

Zhu's policy has delayed the demise of some state-owned enterprises at the expense of countless investors and their hard-earned money, but it did not regulate the behavior of listed companies. Top leaders from many companies joined hands with market insiders to fabricate operational results and wantonly cheat the general investor.

After 2001, shareholders realized that a stock market with no investment value also won't maintain its speculative value in the long run. Shareholders know they still face a long period of decline. The attitude of most of them is to wait for the stock index to increase before pulling out, but with everyone reasoning like that, will stock markets allow them a chance to do so?

Back when the Shanghai General Index was growing, the media used two platitudes -- "The Chi-nese economy is outstanding" and "The stock markets are an indicator of the national economy." You should not expect them to repeat such things now. But when the news of the SARS outbreak in Guangdong was suppressed by the party, the share prices of companies producing vinegar and Isatidis Radix products saw great increases. This shows that the stock market is an extremely sensitive part of the economy. Knowing about positive changes before everyone else, the stock markets reflect the actual economic situation and also forecast the direction of the Chinese economy.

Wang Dan was a student leader during the 1989 Tiananmen Square demonstrations.

Security concerns strain relations

By Phillip Saunders and Jennifer Bulkeley

US-Taiwan relations have never been better, but increased security cooperation is creating tensions and eroding trust on both sides.

Washington has made no secret of its desire to help Taiwan consolidate democracy and protect itself from a possible Chinese military effort to reclaim the island. Yet turning that desire into practical policies to enhance Taiwan's security is proving to be very difficult.

When China fired ballistic missiles to influence Taiwan's 1996 presidential election, then president Bill Clinton deployed two aircraft carriers as a tangible symbol of US commitment to Taiwan's defense. However, critics charge that the Clinton administration refused to sell Taiwan the advanced weapons it needed and that "strategic ambiguity" about the conditions under which the US would intervene on Taiwan's behalf weakened deterrence of a Chinese military attack.

US President George W. Bush's administration moved quickly to address both of these perceived shortcomings. The administration approved sales of a number of advanced weapons systems to Taipei, including Kidd class destroyers, Patriot PAC-3 anti-ballistic missile interceptors, P-3 anti-submarine warfare aircraft and diesel submarines. The process of reviewing future arms sales requests was revised to facilitate quicker approval. Most importantly, Bush declared that the US would do "whatever it takes" to help Taiwan defend itself.

So why doesn't Taiwan feel secure? Bush administration efforts to help defend Taiwan have produced some unintended consequences and left some important issues unaddressed.

Reduced ambiguity and stronger US support have caused military modernization to slow down in Taiwan and to speed up in China. The Legislative Yuan has been reluctant to fund purchase of the weapons the Bush admin-istration approved for sale in April 2001, citing budget constraints and a desire for domestic production. Taiwan's defense budget has been declining since 1996, and the period of conscription for draftees was just cut to only one year of service. Some in Washington question the depth of Taiwan's commitment to its own defense and ask whether Taipei is attempting to shift its defense burden onto Washington's shoulders.

While Taiwan's military modernization has stalled, China has been improving its capability to deter or defeat American forces in a military conflict in the Taiwan Strait. China's continuing buildup of short-range ballistic missiles along with recent and planned purchases of advanced Russian weapons systems such as Sovremenny-class destroyers and Kilo-class submarines demonstrate Chinese efforts to acquire military capabilities that will complicate US efforts to intervene on Taiwan's behalf.

A less publicized change involves increased military inter-actions between the US and Taiwan. These encompass training, intelligence sharing, observing military exercises and discussing possible military responses in the event of a Chi-nese attack. However, the two sides have different objectives and expectations for security cooperation. Taipei prefers exchanges that involve high-level officials and are public symbols of the US security commitment. The US prefers quiet, lower level ex-changes that address practical issues and focus on improving Taiwan's military capabilities. Differing expectations have created frustrations on both sides.

China's economic growth is also exerting a powerful pull on Taiwan and giving Beijing new sources of influence. Taiwan's leaders have tried to set limits on trade and investment to avoid excessive dependence on China, but economic integration has continued to deepen. Although Taipei is concerned about the "hollowing out" of Taiwan's economy and the long-term impact of economic dependence, it has been unable to formulate a coherent response. (One recent proposal, a free-trade agreement between the US and Taiwan, is unlikely to succeed.) Military cooperation with the US has little relevance to a more sophisticated Chinese strategy of encouraging political forces on Taiwan that might one day support unification.

A final concern is the relative importance of China and Taiwan to the US over the long-term. The US has important stakes in Tai-wan, including defending democracy and the credibility of US security commitments in the region. However, some in Taipei question whether these will continue to outweigh Washington's economic and security interests in China. Some fear that the US will ultimately abandon Taiwan in order to maintain good relations with China. These concerns have intensified as Beijing's cooperation in the war on terror and role in seeking to resolve the North Korean nuclear crisis have become more prominent. Recent statements that the US opposes Taiwan's independence and US pressure on Taipei to refrain from statements and actions that might provoke Beijing have reinforced these concerns.

As the Pentagon's latest report on Chinese military power illustrates, Beijing is actively working to develop the military capabilities necessary to determine Taiwan's future. Advanced arms sales, expanding unofficial security ties and a clearer US security commitment have not solved Taiwan's security problems. Indeed, US efforts to enhance security cooperation are exposing underlying tensions in relations between Taipei and Washington. US military power can play an important role in maintaining stability across the Taiwan Strait, but military measures cannot solve the problem. At the end of the day, Tai-wan's status is a political dispute that requires a political solution.

Phillip Saunders is director of the East Asia Nonproliferation Program at the Monterey Institute's Center for Nonproliferation Studies. Jennifer Bulkeley spent the last year as an NSEP Boren graduate fellow in Taiwan and will return to Princeton University's Woodrow Wilson School in the fall.