Right around August 1, which is official PLA Day, the Chinese Communist Party (CCP) newspaper People’s Daily announced the launch of an anti-bribery campaign inside the People’s Liberation Army (PLA).

On August 2, 2006, People’s Daily reported, "To crack down on commercial bribery will become a major task for the army’s supervision work this year and next year."

Preceding the official campaign, the Party fired a deputy commander of the navy for committing a financial crime. According to news released by the regime-run Xinhua News Agency at the end of June, the Central Military Commission dismissed Wang Shouye, a Vice-Admiral, from the post of Deputy Chief of the PLA Navy and expelled him from the Standing Committee of the National People’s Congress (NPC). Other sources reported that the Central Military Tribunal had sentenced Wang to death, with a stay of execution order (a death sentence with a two-year reprieve).

In July, the Central Military Commission approved the establishment of the Leading Group for Auditing Economic Responsibility of PLA Officials. The new Leading Group aims to strengthen supervision of middle- and senior-level PLA officers, and it plans to audit about 1,000 top military officers this year. Wang Shouye is an example to those who cannot show that they have a clean slate.

At the same time, the Party also handed "carrots" to the PLA. Starting from July 1, 2006, PLA salaries were again increased—the average salary for all PLA members was nearly doubled.

The 2.3-million-strong PLA has been the ultimate source of power for the CCP ever since its Red Army formed in 1923. (The name changed to the People’s Liberation Army in 1946.) The CCP charter states that the Party exercises leadership over the People’s Liberation Army and over all other people’s armed forces. The Party’s General Secretary is also Chairman of the Central Military Commission, so it makes sure that "the Party commands the gun." However, the CCP is now facing some challenges to its absolute control over the PLA.

Fan Wu, Chief Editor of China Affairs website, recently analyzed the instability inside the PLA based on PLA publications. Wu referred to an article written by Li Jinai, Director-General of the PLA General Political Department and member of the Central Military Commission. Li’s article "Study the Party’s Charter, Push on Building the Party’s Organization in the Army" was published in the Party’s Qiushi magazine in April. From Li Jinai’s repeated rhetoric of "We must always persist in the Party’s absolute leadership over the Army," to the PLA’s "additional regulations for the Army to implement the ‘CCP’s discipline codes,’" Wu figured out that there have been activities of a serious nature going on inside the PLA:

• Some soldiers and officers privately joined other organizations, participated in religious activities, converted to Christianity, or participated in Falun Gong activities.

• Some soldiers and officers privately possessed serious political materials, including the Nine Commentaries on the Communist Party, and reports on "Quitting the Party."

• Some soldiers and officers published articles or made speeches that were against the Party’s absolute leadership and demanded the Army’s nationalization (that it be loyal to the state not to the Party).

• Some soldiers and officers participated in demonstrations; some were organizing shang fang (appeals to higher-level officials).

Besides the political dissatisfaction, corruption inside the PLA also threatens the Party’s absolute control. In the case of Wang Shouye, the 62-year-old navy Vice-Admiral, he appeared to be a true loyal Party member. He was awarded "Excellent Party Member" and "Excellent Cadre" for four consecutive years in the late 1990s when he was the head of the camp construction unit of the PLA General Logistics Department. However, in private, this married man had five mistresses—all PLA actresses or secretary officers—and he took huge amounts of money from the camp construction fund to finance his corrupt luxurious life. One of his mistresses, Ms. Jiang, even had a son with him. When Wang was promoted to Deputy Chief of the Navy in 2001, he decided to part with Jiang and wanted custody of their son. Ms. Jiang asked for five million yuan (US$0.63 million) from him, but he gave her only one million. After a few years of bitter dispute, Ms. Jiang started reporting Wang’s illegal activities to the Central Military Commission and Navy Headquarters. For about two years nobody in the PLA wanted to listen to Ms. Jiang’s reports. It is said that Ms. Jiang wrote a total of 58 letters before the PLA finally opened a case to investigate Wang.

Wang Shouye was arrested on December 23, 2005, at a routine meeting of navy commanders. He had two loaded handguns in his briefcase and attempted to commit suicide at the time of his arrest. In his two homes in Beijing and Nanjing, the authorities discovered 52 million yuan (US$6.5 million) in cash in a refrigerator and in a microwave, and they found US$2.5 million in U.S. currency in a washing machine. At trial, he was charged with graft and the embezzlement of a total of 160 million yuan (US$20 million).

Of all those ever charged, Wang is the highest ranking PLA official and the amount he stole is the largest ever embezzled. His case reflects the degree of corruption among senior PLA officers.

Another source of instability in the PLA involves leadership succession history. When Jiang Zemin stepped down from the Party’s Central Military Commission Chair in 2005, he assigned his confidants to key positions in the PLA, and left Hu Jintao an empty Chairmanship. To this day, many are still in doubt as to whether Hu has truly grasped control of the PLA.

Hu and Jiang have one thing in common: They are both technocrats and lack a military background. To gain control of the army, they both need to buy favors and build up loyalties. When Jiang was Chairman of the Central Military Commission, he conferred the rank of general to a total 79 P LA commanders. The excessive promotions to the highest rank were widely regarded as Jiang’s effort to buy PLA loyalty. The day after Hu Jintao assumed control of the Central Military Commission, he immediately conferred the rank of general to two senior PLA commanders to show his power.

On June 24, 2006, Hu Jintao personally awarded certificates of command to 10 senior PLA commanders to whom he conferred the rank of general. Those 10 new generals are believed to be Hu’s supporters and will therefore likely be appointed to some key positions in the next Central Military Commission.

According to an article in the July issue of Chinese News Monthly, sacking Wang Shouye was also part of the internal struggle between Hu and Jiang. According to anonymous sources in that article, Wang Shouye had a close relationship with Jia Tingan, director of the General Office of the Central Military Commission. Jia was known as Jiang Zemin’s most trusted confidant. The Central Committee found evidence to show Wang Shouye and Jia Tingan were together in their bribery schemes. To sack Wang Shouye was to threaten Jia Tingan. Hu Jintao’s purpose was to make Jiang Zemin completely hand over his control of the PLA.

To reward those who show loyalty with the rank of general. and to send those who show disobedience to prison, appears to be the simple tactic that Hu Jintao is using on the PLA.

As part of the annual event to promote public awareness against drug use in China, 10,000 people participated in a two-hour march from the Summer Palace to the Great Wall in Beijing to mark the U.N.-sponsored International Anti-Drug Day on June 26, 2006. At the same time, reports of drug seizures and execution of drug traffickers also made headlines, giving an impression that China’s drug problem is being aggressively addressed.

While these are certainly steps toward combating China’s drug problems, the reality may be far grimmer than at first glance. This is particularly true in China because the authorities usually keep a lid on negative news. Such a high-profile public admission is often an indication that the problem may already be out of control. Below are a few signs that point to the magnitude and severity of the problem:

• Over the last two decades, drug addicts have increased in number from virtually non-existent to anywhere from 1.1 million to 7 million, depending on the source of the estimate, and the number is continuing to grow.

• The majority of drug users abuse heroin. Over 70 percent are under 35 years old.

• Geographic distribution has spread from the Yunnan border area adjacent to the Golden Triangle to all over the country, and from metropolitan cities to rural areas.

• Poppies are being grown and used to produce premium drugs in some areas.

• Eighty percent of male drug addicts have committed at least one criminal act other than drug possession, and 80 percent of female drug addicts have been engaged in prostitution.

• Eighty percent of registered drug users have contracted an infectious disease. Over 50 percent of China’s AIDS patients were infected via drug use.

Despite numerous campaigns focused on rehabilitating drug users and harshly punishing the drug dealers, there has been little or no progress in stemming the tide. Drawn by the prospect of making huge amounts of money in a short time, more people are becoming drug dealers and getting better at it.

Many have blamed Chinese society’s moral decline as the root cause. In many instances, corrupt police officers are involved in the drug dealing, mostly providing a security blanket for the drug traffickers. By all indications, China is moving quickly toward becoming not only a big consumer of illicit drugs, but also a new center for international drug distribution.

Russia Faults a Chinese Company for Polluting the Songhua River

[CNA, August 23, 2006] The Niushikou River, a branch of the Songhua River along the Sino-Russian border, was recently polluted by industrial wastes, according to a Russian TV network. The benzene effluent polluted five kilometers (3.1 miles) of the river. A chemical plant in Jilin City was responsible for the accidental discharge of industrial wastes, according to official confirmation.

Surge in Demand for DNA Paternity Tests Among Hong Kong Men with Mainland Wives

[CNA, August 24, 2006] As more and more Hong Kong men marry women from its northern neighbor, problems are also on the rise. Companies that specialize in using DNA to verify biological children have reportedly disclosed that the number of cases of fathers demanding such tests for their China-born children has been steadily increasing. The test results in 2005 verified that about 40 percent of the children tested were not biologically related to their Hong Kong fathers. Zhong Jianhua, assistant professor at the Department of Applied Social Sciences, Hong Kong Polytechnic University, pointed out that the number of these kinds of tests has risen exponentially in Hong Kong. As China’s social structure rapidly changes, the attitude toward marriage among Chinese women is more "open" than those in developed cities in many Western countries. Increase in the divorce rate and out-of-wedlock children, together with distrust between married couples, has resulted in the surge in the number of paternity tests.

Bribery in Business Has Become a Hidden "Rule of the Game" in China

[China Youth Daily, August 21, 2006] According to a recent survey conducted jointly by the Research Institute for International Laws of Economy at Nankai University and the Editorial Committee of "Forum for Government and Party Officials in China" at Central Party School, 94 percent of those surveyed believe that it is common business practice in China to pay commissions, give away gifts, and invite people for dinners. Sixty percent of them lack confidence in the anti-bribery campaign in China’s business world. The main reason for the lack of confidence is their distrust of law-enforcement personnel and authorities. The survey shows that businesses that affect people the most, especially those that involve government intervention, have the most serious problems with bribery. In particular, construction projects and their subcontracting, transfer of land, the trade of state-owned assets, the procurement of drugs and medical equipment, and government procurement all scored 7 (out of 10) points in terms of the degree of bribery.

A Farmer Attempts Suicide in Tiananmen Square to Protest Land Seizure

[Ming Pao Daily, August 11, 2006] Faced with land seizure by the local authorities in Changsha City, Hunan Province, a farmer representing the victims of the land seizures filed many complaints and appealed many times to the local authorities. After failing to resolve the issue, the farmer went to Tiananmen Square on August 6 and tried to commit suicide by stabbing himself in the abdomen. He was found and sent to a hospital but remains in critical condition. The protest letter he left behind states that, as an elected representative for the villagers, he had been appealing for months to various authorities for relief from the land seizures. Not only did his appeal fall on deaf ears, but the police also pursued and tried to capture him. "Only by staining Tiananmen Square with my blood and committing suicide can I offer my apology to my villagers and respected elders," he said in his letter.

Chinese Hospitals Greatly Underreport Death Rate

[The Epoch Times, August 18, 2006] According to a recently published report by the Chinese authorities, one-third of all deaths are not reported to the state monitoring system, while one-fifth of the deaths have never been reported to any organization. Even for the deaths that are reported, the number of deaths is often in error or reported long after the fact. In addition, one-fourth of the deaths are categorized as heart or lung failures.

Beijing Prohibits Foreign TV Programs

[The Epoch Times, August 15, 2006] Beijing authorities held a conference on August 12, calling for a month-long campaign to crack down on the proliferation of foreign satellite TV broadcasts in Beijing. In particular, the key components in manufacturing, sales, and installation of satellite TV equipment will be tightly controlled, and violators will be severely punished. The National Radio and TV Broadcasting Bureau gave orders that, beginning September 1, 2006, all foreign cartoons and their related programming be banned between 5:00 p.m. and 8:00 p.m.

Dell Allegedly Made False Claims in Advertisements in China

[The Epoch Times, August 13, 2006] Dell, the largest personal computer maker in the world, is being sued in China for its alleged false advertising. Some consumers believe that the CPUs used in Dell’s Inspiron 640M notebook computers are inconsistent with what Dell advertised. Dell may face legal rulings and lose its opportunity to gain market shares to compete with Lenovo. China boasts the world’s second largest PC market.

Acknowledging its mistake, Dell’s spokesman in Beijing argued that the discrepancy is the result of the lack of timely updates to its advertisements after replacing its CPUs in some of its notebook computers.

Private Debt Collection Agencies Emerging in China

[CNA, August 12, 2006] As the success rate for collecting debts by legal means decreases in China, private debt collection agencies that use unconventional means are starting to emerge. Some of them have already been registered officially, while others are staying underground. Employees of these companies reportedly terrify the debtors by wearing strange clothes and/or talking and acting weirdly. In addition, they use unconventional means to harass the debtors while staying within the legal limits. As a Chinese lawyer indicated, this phenomenon exists because of the lack of personal bankruptcy laws in China, which results in debtors believing that not paying their debts will not affect their lives or businesses at all. As a result, they would rather squander their money than pay their debts, while their creditors have lost confidence in the authority of the legal system and therefore turn to the collection agencies to collect debts by "marginally legal means."

Scholar Proposes "Two Children and Late Child-Birth" Policy to Overcome China’s Aging Population Problem

[The Epoch Times, August 13,2006] At the publication ceremony for his new book, China’s Population and Its Economic Development in the 21st Century, Hu Angang, director of the Center for China Study at Tsinghua University, argued that, with its low birth rate and low death rate, China has entered the era of an aging population. His new book suggests that the government implement a smooth transition policy of "Two Children and Late Child-Birth" between 2006 and 2010 to battle the aging population problem.

WHO Confirms Present Bird Flu Originated in China

[WHO, August 9, 2006] WHO confirmed on August 9 that the first patient with H5N1 bird flu came from China instead of Vietnam as was previously thought. As a result, it has corrected the pertinent information on its website. WHO previously stated that the case of bird flu infection in Vietnam in December 2003 was the first such case in history, whereas China’s first patient dated October 2005 in Hunan Province. After re-examination by Chinese medical experts, it was confirmed that the patient reported to have died from SARS in November 2003 in Beijing was actually infected with the H5N1 virus.

Taxi Drivers in Hubei Province Strike

[VOA, August 8, 2006] Demanding that the government crack down on unlicensed taxi businesses, over 200 taxi drivers in Shuizhou City, Hubei Province, held a strike on August 7, in front of the municipal building. Despite negotiations with authorities, the official response was that it was impossible to eliminate all underground taxis and that evidence was required to crack down on underground taxi businesses. Dissatisfied with the official response, the angry strikers threw stones at the municipal building. Two representatives of the drivers were arrested.

China to Explore the Chunxiao Oil and Gas Field

[The Liberty Times, August 6, 2006] On August 4, CNOOC announced on its official website that the "Chunxiao Oil and Gas Field Project has entered a period of full-scale exploration and production." Following the announcement, Japan expressed great concerns. A Japanese official indicated that if the quoted announcement is true, Japan will issue a formal protest and it will retaliate by allowing Teikokou Oil to explore the oil and gas fields along the sea borders of Japan and China. As analysts have pointed out, as China enters the Eastern Sea in the name of oil exploration while Japan has expressed its desire to explore oil along the Japan-China sea borderlines to slow China down, the focus of the two countries may not be merely on oil. China’s goal is more likely to expand its military footprint as well as its political might.

Teachers in Hubei Province Protest

[The Epoch Times, August 1, 2006] On December 23, 2005, over 100 teacher representatives from dozens of townships in the Zengdu District of Shuizhou City, Hubei Province, went to the district government to protest. On July 31, 2006, at least 200 teachers from the same townships again went to the Shuizhou City municipal building to appeal. In their official letter of protest, the teachers noted that, although the provincial government issued an annual quota of 500 "local teachers" to be converted to "government teachers" between 1996 and 1998, Shuizhou City authorities did not convert a single civil teacher during those three years [Editor’s note: The latter can enjoy retirement and other benefits that a government worker is entitled to, whereas the former is treated as a substitute teacher although he or she does the same job.]. Instead, many teachers were laid off. So far, the authorities have maintained their hardline position despite the teachers’ protest.

Rabies Spreading in Beijing

[Ming Pao News Net, August 5, 2006] Following the widespread rabies infections earlier in Liaoning and Yunnan Provinces, the number of rabies cases in Beijing is rising every month. From January to June, 69,332 people were infected with rabies. According to a study by the Beijing Health Bureau, the widespread occurrence of rabies infections is due to the hot weather, causing more people to wear less, stay outside their homes more, and walk their dogs more.

China’s Bad Debts Abroad Total US$100 Billion

[Chinese News Services (Hong Kong), August 3, 2006] China’s bad debts from exports total US$30 billion on an annual basis, and it has accumulated US$100 billion in bad debts abroad. According to official media, as of August 3, over 50 percent of China’s companies have delayed their payments. "More and more Chinese businesses are troubled by bad debts abroad. The amount of bad debt has been growing, and so has the risk. Bad debts are multiplied quickly," it says. Studies indicate that 5 percent of China’s export businesses incur bad debts, far exceeding the percentages for European countries, the United States, and many Asian-Pacific countries. The data from China’s National Information Center also shows that among the overdue bills for international trades, 65 percent are overdue for more than six months.

Former Beijing Deputy Mayor Escorted to Xinjiang for Investigation

[Sing Tao Daily, August 2, 2006] Liu Zhihua, the former deputy mayor of Beijing Municipality, and Jin Yan, who is the associate commander general of the Beijing Olympic Games, have been escorted to Xinjiang Province to be isolated and investigated by the Central Commission for Discipline Inspection. Liu Zhihua was removed from his position on June 1, 2006, because of his alleged corruption and "dissolute life." Liu used to be in charge of urban construction and planning and the construction projects for the 2008 Olympic Games in Beijing.

The Largest Private School North of the Yangtze River Closed

[CNA, August 2, 2006] Double Moon Garden (Shuangyue Yuan) School of Linxin City, Shangdong Province, the largest private school in northern China, announced its closure on June 29. This is the second closure of a large private school in China since Nanyang Education Group, the "Carrier of China’s Private Education," collapsed earlier. Zhou Guangjun, director of Luozuang District Education Bureau in Linxin City and representing the operational body of Double Moon Garden School, explained that the main reason for the school’s closure was due to the sudden withdrawal of the "Education Reserve" by students’ parents, which made it impossible for the school’s operators to cover all its debts. The "Education Reserve" is a popular fundraising method that has been adopted in China since 1993. It collects a fee from the family of each student, ranging from tens of thousands to hundreds of thousands yuan (thousands to tens of thousands of U.S. dollars). After paying the fee up front, the parents do not have to pay tuition or room and board for each school year. With the reserve, the school authorities build facilities or invest in other assets. When a student graduates, the school refunds the principal of the original payment by using its interest profits or newly collected reserve funds.

Price Hike for Consumer Products in Guangzhou Exceeds That of Beijing and Shanghai for the First Time

[Asian Times, August 5, 2006] Along with the rise in cost of natural resources over the past year, the consumer price index in Guangzhou shows no signs of decline. Increases in the rates of electricity, gas, transportation, and food all exceed that of Beijing and Shanghai. According to the Research Center for Social Information Surveys, among farmers, the unemployed, and the low income, over half of the people surveyed said they could not afford the price increases in Guangzhou, while most residents feel the (negative) impact of the price increases on their living standard. Almost half of the consumers say they will reduce their purchases.

Abuses of China’s Government Fund To the Tune of US$3.7 Billion

[Xinhuanet, July 30, 2006] In the first half of this year alone, US$3.7 billion in government funds was stolen, abused, or wasted, report the government auditors. China’s State Auditing Administration reportedly charged 252 people for their involvement in abusing government funds. Ninety-eight percent of the people charged have been turned over to law-enforcement or other judicial organizations. The State Auditing Administration said that its main focus in the second half of the year would be to audit the corruption and waste in the agricultural and other rural organizations.

Bank of China Freezes North Korea Accounts

[The Epoch Times, July 26, 2006] Beijing’s North Korea policy has undergone some subtle adjustments after North Korea’s test missile launches. Citing North Korea’s money-laundering and counterfeiting of U.S. dollars, lately China has frozen North Korea’s assets in Chiyu Banking Corporation Limited, a subsidiary of the Bank of China—China’s second largest bank. This is China’s first economic sanction against North Korea.

According to a July 26 Voice of America report, China has allowed three North Korean refugees who forced their way into the U.S. Consulate in Shenyang to seek political asylum status in the United States. Media reports say that this was the first time that China allowed North Koreans to leave for the United States directly without going through a third country.

Three-Fourths of Chinese Studying Overseas Don’t Return

[Radio Free Asia, July 15, 2006] Distinguished scholar Zhang Feng wrote in the blue book China Human Resource Development Report No. 3 that China’s current high-level human resources suffer from severe "brain drain." If the situation continues, it will damage China’s overall human resources and economic security. In the 25 years from 1978 to 2002, China sent 580,000 students and scholars overseas, but only 150,000 have returned.

In the blue book, the author commented that China lacks capable doctoral degree advisors. The data shows that two-thirds of advisors for doctoral candidates in China also supervise master’s candidates, and that each advisor on the average has 5.77 doctoral students under supervision. This number is much higher than the international average of two to three Ph.D. students per advisor.

Seventy Percent of Chinese Intellectuals Risk Death from Overwork

[Radio Free Asia, July 16, 2006] In the recently published China Human Resource Blue Book 2006 edition, death from overwork has become a cloud over the head of Chinese intellectuals. Quoting the 2006 China Human Resource Blue Book published by the China Academy of Social Sciences, Beijing Legal Evening News said that 70 percent of Chinese intellectuals are at risk of death from overwork. Their average life span has declined to 53-54 from the previous 58-59.

[Editor’s note: The Chinese Communist Party (CCP) has recently advocated again for building a strong army. The Party’s official magazine, Quishi, published an article in July to emphasize that a "strong army" is one of the essential prerequisites for China’s development. The article maintains that the hostile Western forces do not want to watch the emergence of a strong socialist China in the East, and they try very hard to contain and suppress China’s development. The article points out that there is still a big gap between China’s overall military strength and its counterparts in the developed countries, while elements of instability and uncertainty are growing and the pressure to safeguard China is increasing. The article says that China, as a major socialist power, needs a strong army to explore the global markets, utilize global resources, and protect national interests.

The state media Xinhua News Agency soon republished a condensed version of the article to further disseminate the message to the general public. Below is a translation of this report: "China’s Prosperity Needs a Strong Army as a Guarantee."]

China’s Prosperity Needs a Strong Army as a Guarantee

According to a recent article in Quishi magazine, China is at a critical stage in planning its important strategic opportunities for the first 20 years of the century. The need to balance the development of China’s military with its economy is both urgent and practical. National security and development are the most fundamental requirements of any country since a prosperous economy and a capable military are the two basic prerequisites for a strong nation. They are also China’s two strategic goals for achieving a society of modest means.

"The Quishi article says that China has made tremendous achievements in its economic development since the ‘Opening-up’ policy was first adopted. In particular, its overall economic strength and level of modernization have made rapid improvements. Nevertheless, compared to developed countries, there is still a big gap. Because they possess a leading edge in economic technologies, the Western-developed nations are putting great pressure on China. Such pressure will persist for a long time. In order to resolve its major social conflicts, the only correct choice for China is to liberate and develop its productive forces and constantly improve its economic strength. Continuous, rapid, balanced, and healthy development of China’s national economy is the top priority for achieving the goal of a wealthy society, and it lays the material and technological foundation for the development of a solid national defense. Therefore, China must focus on economic development, take it as a top priority for our government, and firmly take advantage of this important, strategically opportune period to develop its economy. The development of the national defense must yield to and serve this top priority, and the military must plan for its own development by following this top priority.{mospagebreak}

"According to the article, in order for the development of the national defense and the army to serve the big picture of the overall development of the country, a certain level of national defense capacity is a prerequisite. Only when the army possesses the necessary capability for actual combat and the deterrence of force can it provide a guarantee of security for the country’s peaceful development, while laying down a solid defense foundation to take advantage of this strategically opportune period. Today there is still a big gap between China’s overall military development and its counterparts in the developed countries. Therefore China’s military is urgently in need of moving a giant step forward to improve its defensive capabilities in the increasingly hi-tech world of combat. A balanced development of China’s economy and its military is an urgent requirement for the latter to accomplish its mission at this stage in the new century.

"Economic development is the foundation for the strength and development of the country, reports the Quishi article, while military development is the country’s guarantee of stability and security. Without a strong economic base, there can be no modernization of the military. On the other hand, without a strong military, the environment for economic development cannot be protected. The prosperity of the country must be protected by a strong military, while a strong military requires the prosperity of the country. Only with the balanced strength of its military and economy can various risks and challenges be handled proactively.

"The Quishi article states that the global situation has been undergoing profound and complex changes, while the role of military factors on the global structure is escalating. In this environment, our military capability will play an ever more important role in protecting our national security and interests. While peaceful development is still the theme of this period, the elements of instability and uncertainty that affect peaceful development are growing. These elements greatly affect China’s security and highlight the great importance of protecting national security.

"Whether or not China can accomplish peaceful development depends on the establishment of a peaceful, secure, and stable environment. As history shows, the article continues, peace does not come from someone else’s offer. Only with a strong military and a solid national defense can we build a protective screen, provide reliable strategic support for development, maintain a stable external environment, and achieve the longest possible period of time for peaceful development.

"This strategically opportune period is the golden age for development as well as a period with many security threats and challenges. The hostile Western forces do not want to see the emergence of a strong socialist China in the East. They try very hard to contain and suppress China’s development. The political and military situation in China’s neighboring regions is rather complex, with increasingly more unpredictable elements. Stubbornly in favor of splitting the motherland, pro-Taiwan-independence forces have become a significant hidden danger to China’s security.{mospagebreak}

"The Quishi article notes that, as China’s involvement in economic globalization grows and its open-door policy accelerates, its requirements for exploring global markets, utilizing global resources, and protecting its national interest become higher and higher. Today, military innovations and the use of information technologies in the military are widespread. In fact, they are rapidly changing the world’s military forces. In the face of such a complex global environment and the ever increasing demand at home for national defense, China, as a major socialist power that follows an independent foreign policy of peaceful development, must possess a strong military to protect its national security and safeguard the smooth development of socialist modernization."

Translated byCHINASCOPE from July 2006 issue of Qiushi magazine http://news.xinhuanet.com/politics/2006-07/26/content_4878748.htm

Investors love winners. So when Baidu on May 9, 2006, reported a huge earnings growth in its first-quarter financial results, the market responded enthusiastically, and Baidu’s stock price jumped 22 percent.

But a closer look at the company’s recent moves has made analysts suspect that some questionable business practices might have aided Baidu in achieving its impressive earnings.

Baidu’s second-quarter earnings report was due on July 26. On July 10, Baidu announced that it would cut jobs in its profitable search engine operations, which had seen a 70 percent annual growth rate. Competitors, including Google, all regard search engine operations as a vital piece of their business. Baidu’s move turned many heads.

At a press conference on July 13, Baidu’s CFO Shawn Wang cited fiscal losses and non-core competence as two key triggers for the "painful decision to shut down the Enterprise Software (ES) division." However, an employee from ES told reporters that in 2002, when ES was under Baidu COO David Chu’s direct watch, it was the major breadwinner for the company. By 2003, its profit had reached 5 million yuan (US$625,000). By 2005, the division had contributed over 15 million yuan (US$1.9 million) to the company.

Insiders believe that the real motive behind Baidu’s job cut was to take away employees’ stock options, which are valued at 20 million yuan (US$2.5 million), to make the numbers look better.

One-Stop Shop Termination with Four-Hour Notice

On July 10, an email was sent to ES employees asking everyone to attend an important meeting at 2 p.m. Both David Chu and Lu Lingming, Baidu’s Human Resources director showed up at the conference. Chu told everyone at the meeting that the company had decided to shut down their division. Lu then announced that to make things easier, the company would provide a one-stop exit process to the terminated employees. More than 20 employees across the country received a four-hour notice. They were ordered to turn in their laptops and key cards, pack their personal stuff, sign the notice, and leave the company by 6 p.m. The front desk was notified. Those who refused to sign would not receive any severance pay.

Employees were stunned that they were fired in such a humiliating way.

"This is pure intimidation," one insider grumbled.

Quite a few of these impacted employees had worked for multinational companies prior to joining Baidu. They have highly marketable skills and solid experience. Many of them have traded their well-paid jobs elsewhere to join Baidu simply because of the stock options. Being treated in such a way is beyond disappointing.{mospagebreak}

"Had they informed me in advance, I wouldn’t have even bothered to take the severance pay. I would walk out of this place without looking back. Obviously, Baidu does not care to respect its employees’ feelings," said one of them.

One impacted employee was angry at the sudden layoff. He said that Baidu’s conduct violates China’s Labor Law, because the company failed to issue any notification in advance or discuss the compensation package with the employees.

He and a few others are considering legal actions against Baidu.

Wiping Out Millions in Stock Options

Baidu’s first-quarter net income was 35.2 million yuan (US$4.4 million), up 43.5 percent over the previous quarter, or 1,309.0 percent year-over-year. Within hours after its financial data was made public, Baidu’s stock jumped 22 percent to a record high of US$74.85 per share.

Achieving this milestone may be a miracle, but sustaining the success and keeping investors happy will take more than just a miracle. The bar is higher now.

To improve the bottom line, Baidu needs to either grow revenue or reduce cost. Among Baidu’s 2,000 employees, nearly half are in sales and telemarketing. Although these employees are playing a major role in Baidu’s rapid growth, the company does not reward them well, according to insiders. Baidu pays them as low as 600 yuan (or US$72) per month as their base salary and does not offer them stock options. Slashing headcount there will bring little impact to its bottom line.

The July layoff is targeted at Baidu’s Enterprise Software, which provides search engine services, such as selling competitive intelligence collected by its search engine to enterprises. The impacted employees were making a six-figure salary on average, and most of them were awarded with stock options, mostly over 4,000 shares or more. "Based on the current stock price, these options are worth at least 10 million yuan (US$1.25 million)," an insider reveals.

But CFO Shawn Wang told reporters on July 13 that only half of the terminated employees had stock options, indicating a much smaller windfall.{mospagebreak}

Pay-for-Ranking to Increase Revenue

To boost its organic growth, Baidu adopted Pay-for-Ranking. Users are not very pleased with this practice. One programmer calls it "twisting the facts with money."

It can be frustrating, too, to many search engine users. They may not get what they want, or simply be misguided by the commercials that pay their way to be on the top.

One user gives this example: When a cancer patient visited Baidu’s home page and typed in "cancer" as a key word for search, Baidu returned four pages of Pay-for-Ranking advertisements before providing meaningful search results on page 5.

Many programmers believe that Pay-for-Ranking severely compromises the accuracy and the credibility of search results. Yet, driven by insatiable appetite, Baidu has pushed hard to promote this practice. Many in the search engine field are worried.

Anti-Baidu Alliance

A group of webmasters who believe that they were unfairly treated by Baidu has formed an Anti-Baidu Alliance to protest certain business practices and sales policies at Baidu.

Ta Xue Wu Hen, or "Stepping on the Snow Without Leaving a Trace," a popular webmaster in China, and some of his Web buddies believe that Baidu blocks their websites to forcefully promote its Pay-for-Ranking product. Many webmasters in similar situations reveal that they have received phone calls from Baidu selling its Pay-for-Ranking product and after they refused to subscribe, Baidu immediately blocked their sites.

Ta thinks that these cases tell a tale of Baidu’s greed. Many programmers believe that Baidu has gone too far to gain instant profit, that its conduct is unethical.

The company’s name, Baidu, was inspired by an 800-year-old ancient poem and literally means "hundreds of times," representing persistent search for the ideal result and winner. In the end, it is the inspired investors and users who will determine the ideal result and real winner, through persistent search.

Helen Chou is a writer based in New York.

With surging housing prices, Beijing is becoming the "King of China’s Housing Market" amid China’s macroeconomic control instituted a year ago. While the fear of land shortage has triggered panic home buying, investors are flooding to Beijing, and the central administration is considering a new policy.

On April 23, the number of people waiting in line in the bank lobby—the Beijing Huaxiang Branch of the Agricultural Bank of China—remained at about 50.

There was no money left in the ATM machine outside the bank. "The money has been withdrawn to buy houses," said the bank security guard.

The busy bank is an indication of the heated purchases going on in the apartment building next door. Owners of the Ten-Thousand-Year Flower City, an apartment building next to the bank, had started to sell VIP cards for 10,000 yuan (about US$1,2551). The cards gave buyers priority in selecting their apartment units, and they could apply the cost of the card toward the purchase price. More than 200 cards were sold on the first day.

Located on the southwest side of the Third Ring of Beijing City, this apartment complex has gone through whirlwind increases within the past three months. The selling price in January was 5,700 yuan (US$713) per square meter. (All prices are per square meter, which is about 1.2 square yards or 10 square feet.) The price rose to 6,600 yuan (US$825) in March. When its fourth phase was ready for sale in May, the price was expected to increase to 7,000 yuan (US$962), a 35 percent increase from January.

Housing prices in the capital city have increased steadily since spring of this year. On April 12, the Beijing Urban Construction Research Center announced that the expected average price of residential housing in the city was 6,885 yuan (US$860) per square meter, a 14.8 percent growth over the same period last year. Some media reported that the housing prices in Beijing had exceeded that of Shanghai, making Beijing the "King of China’s Housing Market."

It was a strange phenomenon: The supply, sales, and prices of Beijing’s housing market increased, but there was still a housing shortage.

About the same time last year, the central government maintained an iron grip on the real estate market. The State Council’s Old Eight Regulations and New Eight Regulations were issued in succession and caused housing prices to stagnate.

Why were housing prices increasing rampantly one year after macro-control? What drives the phenomenon? Some real estate agents are starting to worry that this round of price hikes is a dangerous signal.{mospagebreak}

The "Crazy Rise" in Housing Prices

"That is crazy!" Liu Bo just cannot imagine how the price of Coastal Sailuo City could go up several hundred yuan per square meter in a month. "Beijing housing prices are rising like crazy, and people are buying like crazy," Liu said.

"If you do not decide now, you will have to wait for the next phase," Tang Xiaoyuan, the sales lady of Coastal Sailuo City, advised Liu. The longer he waits, the more expensive houses will be.

The sales pitch made Liu nervous. In early March, when Coastal Sailuo City offered to sell at 7,400 yuan (US$925) per square meter, he just smiled and shrugged it off: "Let me wait for a while." In less than a month, the price rose to 7,800 yuan (US$975).

A week later, Liu Bo, still undecided, was informed that some of the models had sold for as high as 8,200 yuan (US$1,025).

"In one evening, Beijing can be covered with a layer of yellow sand, and I have to pay an additional 100,000 yuan (US$12,500) in total purchase in one month," he said.

Liu, who works as an editor in a publishing company, has a monthly income of 7,000 yuan (US$875). After the Chinese New Year, he started to think about buying a house. However after two months of searching, everything he could see had been hit with price increases.

On April 10, when he rushed to register for the pre-selling of the second phase of another residential housing development, Sihao Yijing, the price had already climbed from 8,300 to 8,500 yuan (US$1,038-$1,063) in only four days.

"I just want to have a home of my own," Liu said, but he felt that his home was fading farther and farther away from him. "If there has to be a deadline for me to get a house, it’s better to be before the end of my lifetime."

Zhou Xiaodong, a white-collar employee, planned to buy his new house somewhere around the Fourth Ring of Beijing, where the transportation is convenient and the price was 7,000 yuan (US$875) per square meter with a total price of 600,000 yuan (US$75,000). On April 9, after he attended the 2006 Beijing Spring International Housing Exhibit, he found that residential property in the 7,000 yuan (US$875) price range in the Fourth Ring area was almost gone.{mospagebreak}

One phenomenon evident from the housing exhibit is that the increase in prices is not affecting housing sales. Sales price, supply, and sales volume went up hand in hand.

Over 90 apartment units were displayed at the exhibit, which drew 200,000 people. There were 2,000 purchase offers made: a total of 231,320 square meters (2.49 million square feet), 1.44 billion yuan (US$1.4 million) in sales revenue, and a 300 million (US$37.5 million) increase (40 percent) over the winter exhibits last year.

The statistics of Beijing Real Estate Information Network show that the presold units for the first quarter this year amounted to 3.7 million square meters, while it was 3.2 million square meters for the same period last year, an increase of 15.2 percent from one year to the next. The number of online purchases also grew rapidly, with a daily number of signed contracts reaching over 500 and with a record high of 803 on April 15.

The housing prices in Beijing have even surpassed those in Shanghai, which was believed to have the highest housing prices in China. Data released by the Statistics Bureaus from these two cities showed that Beijing’s housing prices are 27 yuan (US$3.4) per square meter higher than Shanghai’s prices.

On April 13, Nanfang Weekend claimed that Beijing has become the "King of China’s housing market." However, some official statistics do not agree with the price hikes.

On April 12, Beijing Urban Construction Research Center announced that the average Beijing residential pre-sell housing price for the first quarter was 6,885 yuan (US$861) per square meter, 14.8 percent higher than the preceding year. (The price growth for the first quarter in 2005 was 19.2 percent.) The conclusion was that the "pre-sell housing price is stable on a quarter-to-quarter basis, with an evident fall of growth rate on a year-to-year basis."

On April 20, statistics published by the Beijing City Statistics Bureau listed the growth rate of housing prices at 7.6 percent.

However, those statistics are based on the average price of houses in all of Beijing, including those in Miyun and Huairou, which average 3,000 yuan (US$375) per square meter or lower. The price increase in the Fourth Ring area far exceeds these figures.

"Even if the growth rate is lower, the base is already too large," Liu Bo said, and he still cannot afford a house.{mospagebreak}

Driven by Panic Consumption?

"We can unite and not buy houses so that we can drag the prices down," Liu Tao, a buyer, cried out loud in the exhibit.

He drew attention, but prospective buyers immediately turned back to the developers for flyers. It was 4 p.m. on April 9. More than half of the developers at the Spring Housing Exhibit had left, but there were still groups of people crowded at the gate of the exhibit.

"The higher the price increases, the more people buy; the more people buy, the higher the prices will be," Liu said. Buyers fighting for purchases drive the price increases.

Li Wenjie, the general manager of Northern China Region of Zhongyuan Real Estate, thinks that since the beginning of 2006, buyers have been in a wait-and-see mentality. But when they found that prices kept increasing, they started to make purchasing decisions out of fear that prices would continue to go up.

In May 2005, seven ministries and commissions, including the Ministry of Construction, issued a notice entitled "Doing a Better Job Stabilizing Housing Prices" that stated that starting from June 1, 2005, individual buyers would need to pay sales tax for transactions made less than two years after the initial purchase.

Compared with the rapid price decline in Shanghai, the prices in Beijing did not drop even though the real estate market slowed down for a while.

"Macro-control needs to be adjusted," said Wang Yulin, the vice director of the Policy Research Center of the Ministry of Construction. "Last year, the target of macro-control was the real estate investors, but there are not that many in Beijing yet."

Another huge group of buyers were also propping up the prices in Beijing.

On April 9, in Xinghe Bay, outside the East Fourth Ring, several Beijing government officials were showing the houses to officials from other provinces. The price tag of 16,000 yuan (US$2,000) per square meter did not scare the buyers away. In March alone, nearly 80 suites were sold, with sales revenue of 50 million yuan (US$6.3 million).

There are too many rich people and officials wanting to buy houses in Beijing," a sales representative and former employee of the high-scale Zhuyucheng Apartment Complex and Phoenix Real Estate told us privately. Most of the officials come from nearby provinces and cities, and the majority of the business buyers are owners of coal mines in Shanxi Province.{mospagebreak}

"In addition, we have clients such as college graduates, companies relocating or stationing in Beijing from foreign countries or other provinces," said Huang Xiqing, the vice general manager of Thousand-Year Flower City.

Many buyers are under the impression that if they don’t buy, other people will buy.

But insiders analyzed that the buyers’ groups have formed a structure like a pyramid, with people on the bottom of the food chain who are not well off but who have the highest demand for houses.

Many people who were interviewed used "panic" to describe their feeling: "If I don’t buy now, the price will keep rising."

Huang Xiqing, the vice general manager of Ten-Thousand-Year Flower City believes that the three objectives of macro-control are "to tighten the money and land supply, and control price increases." The goal was to lower the risks, adjust the structure, and control the speed of urban development thus inhibiting rapidly rising housing prices. But in reality, tightening the money and land supply turned out to be the factor that is driving housing prices.

Wang Zhigang, the famous strategic real estate advisor and consultant, said in an interview with China Business Newspaper, "the burning fever of Beijing’s housing market is actually driven by panic consumption and investment purchases."

Not a Fair Game

Facing ever-increasing housing prices, can ordinary buyers play games with the developers?

"It is not realistic," Huang Xiqing said. "Unlike the developers, it’s difficult for the buyers to unite."

In the year of macro-control, people were holding money to wait and see—and so were the developers.

"In less than a year, the buyers ended up paying for the increase in several hundred yuan per square meter," one real estate agent explained. If the buyers were playing games with the developers, apparently the buyers lost in the end.

Sales control is a common practice used by every developer and agent in this game.{mospagebreak}

On April 9, 2006, in the Sihao Yijing real estate model home, one sales representative shared the selling strategy: First ask prospective buyers to register. Get to know their situations to determine the selling price. If 500 units are ready for sale, we only put out 100, which are usually not that good. When those 100 are sold out, we immediately raise the price.

From the beginning of the buyer registration to the date of sale, the price at Sihao Yijing had already risen from 8,300 to 8,500 yuan (US$1,038-$1,063) per square meter. Sellers claimed that "the numbers of registered buyers … exceeded total available units."

"Buyers will not be able to play the game with the developers because playing games requires resources," said Duan Meiyuan, the general manager of the Beijing Chaoyang Great Real Estate Agency. "Because developers had a lot of land in hand with financial resources far stronger than [that of] buyers, the buyers weren’t able to fight against the developers."

Earlier this year, in Guangzhou, where the housing prices also went up rapidly, people started to criticize developers’ collusion to drive up prices, calling it "robbery."

This opinion was shared by Zhang Yaoqing, professor and director of the Real Estate Research Center of Capital Economic and Trade University.

Zhang believed that the bargaining power is in the hands of the developers because the real estate market is a semi-monopolized market, and the developers usually collude on pricing.

"They may not openly drive up the prices, but they collude to support the prices," Zhang said. No matter the quality of the houses, new house prices usually follow the highest price in the neighboring area and will be adjusted up periodically.

One real estate developer told our reporter, "In Beijing, no matter how poorly the houses were built and what kind of real estate services were provided, you can always sell for a high price, and they will be gone immediately."

Invisible Hands Promote Fear of a Land Shortage

"If you don’t buy now, you will not be able to buy them no matter how much you spend," said a sales lady for CBD Legend, near the East Three Ring area. She was speaking to a reporter at the State Housing Exhibit. She said that the government will soon stop issuing land permits in the city, so there will be no new construction.{mospagebreak}

CBD Legend is becoming legendary for its price hikes: In December 2005, the opening price was 8,000 yuan (US$1,000) per square meter; it is now 8,800 yuan (US$1,100).

Beijing housing prices continued to go up, and the notion of a shortage of land for new construction expedited the process.

In July 2005, the Beijing Bureau of Land and Resources published the quota for land use for the year, which stated that no new construction for residential housing would be added within the Second Ring area.

Land price increases also jacked up the housing prices.

On April 17, one piece of land in the Fengtai District was sold for as high as 34 million yuan (US$4.25 million) after 64 rounds of auction.

It was calculated that the final price for the land was 3,376 yuan (US$422) per square meter. Tang Wenjian, the winner and the general manager of Beijing Zhengjiang Real Estate said, "We have to put the sale price higher than 8,000 yuan (US$1,000) per square meter to make a profit."

This price is a lot higher than most houses in the area. In September of last year, the opening price offered by Zhonghai City, a 1.7 million square meter development area, was 5,400 yuan (US$675) per square meter, and the current selling price is only about 6,500 yuan (US$813).

An insider estimates that if one uses the recognized ratio of 40 percent of the price for the land, theoretically speaking, if the land becomes sellable for housing, in one year the price can be as high as 12,000 yuan (US$1,500) per square meter.

To Li Wenjie, the growth rate of the selling price for land had far exceeded the normal growth rate of housing prices.

Wang Shu, the general sales manager of Zhongda Hengji Real Estate, said that after the "New Policies for Selling Land" was issued on August 31, 2004, land selling was better regulated while the land price continued to increase with a wide margin. The problem was that while the government benefited from the increase of land sales, the profit margin for real estate developers did not shrink. As a result, the buyers ended up bearing the burden.

"If we don’t regulate the developers, it is useless no matter how much land we sell sell," says Wang Yuling, vice director of the Policy Research Center of the Ministry of Construction. He believes that the government did not do a good job of regulation. It should use administrative means to enlarge the differences in price levels for housing in different categories.

Translated by CHINASCOPE (excerpt) from New Beijing (Xin Jing Bao)  http://news.thebeijingnews.com/0197/2006/0425/018@176810.htm

The Monkey King, known as Xi You Ji (Journey to the West), written by Wu Ch’eng-en (1500- 1582), is one of the greatest classical Chinese epic tales.

The Monkey King is based on the life story of a legendary monk, Xuan Zang (Monk Tang), who was said to have lived during the Tang dynasty (602-664 A.D.). After a decade of trials and tribulations he arrived on foot in what is today India, the birthplace of Buddhism. He had traveled there to find the true Buddhist holy book. When he returned to China, then known as The Tang, Xuan Zang translated the Indian Sutras into Chinese, thus making a great contribution to the development of Buddhism in China.

The Monkey King is an allegorical rendition of the journey, mingled with Chinese fables and stories of monsters, fairy tales, legends, and popular beliefs. The Monkey King, together with the forever-hungry pig Ba-jie and the klutzy carp Sha Sen, all get kicked out of heaven. Now they must earn their way back by accompanying the gentle Monk Tang on an extraordinarily perilous journey to rescue the sacred scrolls and return them to China. Through the adventurous stories of the Monkey King fighting adversities along his journey with prowess and wisdom, the author most fascinatingly embodies the essence of the Chinese Daoist and Buddhist tradition. Monkey King’s magical powers, his cleverness, as well as his mischief and fearless rebellion against authority make him a favorite character for children all over the world.

According to the story, Monkey King is born out of a rock and fertilized by the grace of Heaven and Earth. Being extremely intelligent, an immortal Daoist master teaches him all the magic tricks and Kung Fu. He can transform himself into 72 different images, such as a tree, a bird, a beast of prey, or an insect that can sneak into an enemy’s body to attack from the inside out. Using clouds as a means of transportation, he can travel 108,000 miles at a single somersault.

He proclaims to be The King in defiance of the only authority over the heavens, the seas, the earth, and the subterranean world—Yù Huáng Dà Dì, or "The Great Jade Emperor." That act of high treason, coupled with complaints from the masters of the Four Seas and Hell, incurs the relentless scourge of the heavenly army. The monkey battles into the ocean and seizes the Dragon King’s crown treasure—a huge gold-banded iron rod used as the ballast of the waters. Able to expand or shrink at his command, this iron rod becomes the monkey’s favorite weapon in his later feats. The first test of its power comes when the monkey storms into hell and threatens the Hadean King into sparing his and his followers mortal life so that they could enjoy eternity.

After many showdowns with the fearless Monkey King, the heavenly army suffers numerous humiliating defeats. The celestial monarch has but to give the dove faction a chance to try their appeasement strategy—to offer the monkey an official title in heaven with little authority. When he learns the truth, that he is nothing but an object of ridicule, the enraged monkey revolts, fighting all the way back to earth to resume his original claim as The King.{mospagebreak}

Eventually, the heavenly army manages to capture the barely invincible monkey with the help of tricky warriors. He is sentenced to capital punishment, but all methods of execution fail. Having a bronze head and iron shoulders, the monkey dulls many a sword. As a last resort, the emperor commands that he be incinerated in the same furnace where his Daoist minister Tai Shang Lao Jun refines his immortality elixir. Instead of killing the monkey, the fire and smoke gives his eyes magic powers so that he now can see through things that others cannot see. He fights his way back to earth again.

At his wit’s end, the celestial emperor asks Buddha for help. Buddha imprisons the monkey under a great mountain known as Wu Zhi Shan (The Mount of Five Fingers). The tenacious monkey survives the enormous weight and pressure. Five hundred years later, Tang dynasty monk Xuan Zang, who is mentioned at the beginning of the story, rescues the monkey with the help of reincarnated aides and disciples.

In June, China ended a year-long government freeze on initial public offerings (IPOs). The government allowed the Bank of China and other financial institutions to issue stocks. Why? What are the short-term and long-term effects of this decision on the Chinese markets?

China’s stock market is still in its infancy, heavily influenced by government policies. Its market capitalization is only 3 trillion yuan (US$375 billion), which is about one-third of Hong Kong’s stock market, and 3 percent of the U.S. stock market. The Chinese stock market is out of proportion with the country’s economic development—it is too small relative to the economy. In 2005, the total stock value was only 16 percent of the GDP. By comparison, Hong Kong’s stock value is 600 percent of its GDP. Not only is the stock market small, but also bad risks account for a large portion of the companies listed. In addition, two-thirds of the stocks are not tradable. With both a high saving rate and scarce opportunities for financial investments, China abounds with strong stock speculation—in addition to a lack of investment knowledge and strategy. Consequently, a basic feature of the market is high volatility.

Although China has maintained high GDP growth in recent years, the performance of its A-share market has been disappointing. China’s A-shares entered a bear market in June 2001. Then, within four years, the Shanghai Stock Exchange index dropped from 2,200 to around 1,000. Afterward, for an entire year, China’s stock market did not see any IPOs. The market, however, saw some improvement.

Is it true that if there is no new stock for one year, the stock market will not drop? For lack of alternative investment opportunities, and because there are not many stocks to choose from, the stock market is pushed up by excessive demand. According to financial analysts, the main reason China suspended IPOs was the fact that the stock market had continued declining, the government feared that introducing new stocks would trigger massive selling of bad stocks to buy new ones, and that it would lead the already fragile market to a crash.

The immaturity of China’s stock market and the situation of the country’s financial institutions are directly correlated. China’s A-share market has only 15 years of history. Looking at the companies that offer stock, we see a very irrational structure. Take financial stocks, for example. Compared with developed countries, there are only a few financial stocks listed on China’s stock market. The financial content of the market is grossly disproportionate to its role in the national economy—the industry structure of the stock-offering companies is badly out of balance.

Financial stocks are very important to all the major stock markets in the world. Why are there so few financial institutions listed on the Chinese stock market? Isn’t it better if more financial institutions are seen on the market? The reason is that both the communist government and the banks know that, among all the industries, the financial industry is the least stable and the most dangerous. That’s why over these past years, not many financial companies have been added to the stock market—for fear that people would reject the stocks. Everyone knows that Chinese banks have too many bad debts and are high risk. Yet why is the Bank of China suddenly allowed to issue an IPO? This is due to several factors.{mospagebreak}

International experience tells us that as an economy develops and grows, financial institutions are the biggest winners. As China’s economy continues to grow, many investors view China’s banking industry as a profitable avenue. In the past two years, many foreign investors have purchased shares in China’s financial institutions. Why do they take the risk, knowing that Chinese banks are high risk and have had many bad debts? Because if they don’t, they may lose the opportunity to make big money; in the eyes of the investors, that scenario is also a risk. So when investors weigh the two risks, they are gambling. Which risk is higher? They wish to see this scenario: Economic development brings more profit to the Chinese banking industry, and bank management will improve, which will give banks new market and profit. Maybe the investors believe that Chinese people’s diligence and the current structure will somehow have a better chance for making money than bankruptcy. Of course, they also are clearly aware of their risks: If the bad debts are not resolved, the accumulative effect will trigger a financial crisis, in which case, they will lose all their money. According to Chinese official statistics, the bad debt rates in Chinese banks were down in the past two years. Although most foreign investors don’t trust the official statistics on bad debts, when they keep reading these numbers for a long time, they really would rather believe in them; the numbers make them feel better.

On the other hand, Chinese people’s saving rate is 40 to 50 percent. Chinese people have a total of 30 trillion yuan (US$3.75 trillion) saved in banks. To most people, interest rates on their deposits are too low, yet housing prices are beyond their reach. The return on stock investment is generally higher than the bank interest. This in part explains why in the first several months of 2006 when the global stock markets were doing poorly, the Chinese stock markets were buoyant. As a matter of fact, China’s stock markets gained about 40 percent in the first half of 2006, continuing a rebound from its eight-year low in mid 2005.

When the demand for stocks far exceeded the supply, the China Securities Regulatory Commission re-opened the market for IPOs. Obviously, whichever companies got selected for IPOs got the premium. After a year of pause, the Bank of China got the approval for listing on the stock market. The bonus it received was even bigger. This is a good time to list some financial institutions on the market, and investors may accept them. From another perspective, this decision could also add some excitement to the banking industry, and may even lead to further reforms. As far as the listing banks are concerned, they can get immediate cash and raise their capital, which naturally reduces their risks. In fact, selling bank stocks allows the government to transfer some risks to the investors—especially with new stock owners. The more stock the investors buy, the more money the bank has and the safer the bank becomes. On the other hand, some problematic banks may actually turn for the better as a result of foreign owners’ involvement in the bank’s management and restructuring. This somehow may resolve the big headache of the Chinese financial system. Why not give it a try?{mospagebreak}

Everyone knows that Chinese banks have many problems, and they should reform. Everyone also knows that it is difficult to initiate such financial reform, and the resistance is strong. Banking is vital for an economy. It has a far-reaching effect on the society; non-performing loans (NPLs) are a big issue already, and financial crisis could erupt any time. Since 1999, the Chinese communist government has repeatedly helped the four major banks write off their bad debts and has injected several hundred billion U.S. dollars into the banks. However, these measures did not fundamentally solve the problem. On the contrary, in the beginning of May 2006, Ernest & Young concluded in a report that the total amount of NPLs in China’s banking system is as high as US$900 billion. Although the report was eventually recalled under pressure, China could no longer hide its bad debt issue from the international community.

A recent speech by Premier Wen Jiabao confirmed the seriousness of China’s financial situation. Premier Wen said, "Massive financial corruption cases happen every day." Given this situation, everyone now agrees to bank reform. How can it be accomplished, then? Implementing reform in a bank is different from reforming a company. When it doesn’t work, we just close the company—but the collapse of a bank could trigger large-scale social unrest. Who dares to take the responsibility? In addition, there are so many bad loans. Taxpayers’ money cannot be used to fill the holes in the banks indefinitely. The people will not allow their money to be used like this, either. And it’s no use for officials to issue warnings like "no next time" and then take no action. Otherwise, banks learn quickly that they can count on the government to bail them out again, and they will most certainly get into the same situation next time.

It looks like maintaining status quo is not acceptable, so the strategy becomes: "Let’s do IPO!" Selling bank stocks can raise capital. Let the market be the judge and the driving force. Last year, two banks in China issued IPOs, and their stocks since day one have been on the rise. After its success in the Hong Kong market, the Bank of China issued A-shares in the Chinese stock market. Its stock prices surged on the IPO day.

However, how many IPOs can the market absorb now? Recently the China Securities Regulatory Commission was preparing for a new batch of IPOs. The information leaked out, and the market responded violently. On June 7, the Shanghai stock market index dropped 5.3 percent, which is the largest daily drop in the past four years. Subsequently, the Shanghai stock index plummeted another 4.8 percent on July 13 as a result of the news that the Industrial and Commercial Bank of China and the Datong-Qinhuangdao Railroad plan to issue IPOs on the Shanghai Stock Exchange. China’s stock market is small and volatile. Although Chinese people have huge savings reserves, with the country’s very fragile social welfare, medical care, insurance and pension plans, most Chinese cannot afford the risks of the volatile stock market.{mospagebreak}

In addition, before the end of this year, the stocks of 201 companies will come out of their IPO locked-in period, and 76 billion yuan (USD $9.5 billion) of non-tradable shares may now enter the secondary market. As a result, China’s stock markets will experience jitters in the second half of the year. Under such circumstances, companies that issue IPOs may not have the same luck as the Bank of China. Chances are that the popularity of new stocks won’t last long. As a matter of fact, while this article was being finished, news came that Air China cut its IPO size by 39 percent due to signs of weak interest in a domestic offering.

Dr. Tianlun Jian is a Senior Economist at Eaton Corporation. After he received his Ph.D. in Economics from Boston University, Dr. Jian joined Harvard University as a Research Associate and published research papers on China and India. Dr. Jian also worked in the People’s Bank of China and participated in the reforms on the RMB foreign exchange system and foreign investment policies