Sat, July 13

The Rise and Fall: The Untold Stories of China’s Stock Market Pioneer

How much longer can this stock market fall? On January 31st, the stock market closed down across the board, with the Shanghai Composite Index once again falling below 2800 points. Of course, there is a silver lining, as there are still 4765 stocks leading the way. Although this episode talks about the stock market, it’s not about the current market, but rather the historical market recorded in textbooks. We are accustomed to viewing the stock market from above, but what lies beneath is unknown to us. Today, through a book and from the perspective of someone who experienced the growth of China’s stock market from scratch, we will explore what truly makes our market unique.

The book I want to share today is called “Twenty Years of Glory and Disgrace: My Life in the Stock Market.” The author is one of the participants in the development of China’s securities market from scratch, regarded as one of the three “godfathers” of Chinese securities, Kan Zhidong. He has recorded many “firsts” in the history of China’s securities development, such as underwriting the first A-share, issuing the first financial bond, the first corporate short-term financing bond, establishing the first securities trading counter, participating in the construction of the Shanghai Stock Exchange, compiling the first domestic stock index, and issuing China’s first annual stock report, among others. The book documents the background of the stock market’s establishment, how the Shanghai Composite Index came about, how thrilling the early stock market was, as well as the ins and outs of major events like the competition between Shenzhen and Shanghai, and the bankruptcy of Southern Securities. The book provides details that are usually inaccessible to the general public, making it a worthwhile read. Reading this book is like watching the evolution of an era from black and white to colour, from the 1980s and 1990s to 2006, over twenty years of untold insider stories and events in the A-share market, all from Kan Zhidong’s personal experiences.

After graduating from high school in 1970, Kan Zhidong went to the Great Northern Wilderness in Heilongjiang, where he lived in a small village for nine years and acquired a university education through self-study. In the early 1980s, he participated in a securities training class in Shanghai organized by Nomura Securities, Japan’s largest securities company at the time. He was then sent to Japan for further study and training. After returning, he was assigned to manage the Jing’an Securities Business Department, where he launched stock trading operations and developed the Jing’an Index, which started with a base index value of 100 points. Later, he took over at Shenwan Securities, played a role in the establishment of the Shanghai Stock Exchange, and served as its Deputy Director. In 1990, when the Shanghai Stock Exchange was established, the Shanghai Composite Index was compiled based on the Jing’an Index. However, there were some domestic oppositions to establishing the Shanghai Exchange, as stocks and stock exchanges were considered decadent capitalist products at the time.

At Shenwan Securities, he achieved remarkable results, such as participating in the issuance of several construction bonds for the Three Gorges Project and underwriting the stock of Tsingtao Brewery, among others. Then came the competition between Shenzhen and Shanghai. The rivalry originated in 1990 when the state decided to establish the Shanghai Stock Exchange and position it as the only securities exchange in the country. However, Shenzhen covertly competed with Shanghai. Initially, the Shanghai Stock Exchange was set to open on December 19th of that year, but Shenzhen preempted by announcing the trial operation of the Shenzhen Stock Exchange in late November and officially established it in April the next year. Shanghai claimed the stock issued by Shanghai Feilo Acoustics Co., Ltd. in 1984 as the first publicly issued stock in China, while Shenzhen designated the privately issued stock of Shenzhen Baoan Group Co., Ltd. in the early 1980s as the republic’s first stock. Shanghai declared the Jing’an Securities Business Department, established in 1986, as the birthplace of the new China’s securities industry, while Shenzhen claimed the Special Zone Securities Company, established in 1987, as the cradle of China’s securities industry.

Shanghai believed that the decision to develop Shanghai as a financial centre was a central policy, while Shenzhen argued that a financial centre is not something that is granted, but rather achieved through hard work. Whether Shanghai was strong and Shenzhen weak, or vice versa, was a matter of debate among Shanghai’s leaders, who were eager to establish a clear hierarchy. The focus then shifted to the stocks of Lujiazui, where the old stockholders of Lujiazui shares were continuously selling off, leading to a downward trend in the Shanghai stock market, making the phenomenon of “Shenzhen strong, Shanghai weak” even more apparent. By that time, Shenwan had merged with Guotai to become Shenwan Guotai Securities. Someone approached Kan Zhidong, saying that if Shenwan Guotai Securities did not take action on Lujiazui shares the next day, the leadership would definitely blame them. After discussions, Shenwan Guotai Securities cautiously operated Lujiazui stocks while keeping the company’s finance and accounting departments in contact with the relevant municipal departments. At the same time, other securities institutions in Shanghai also entered the Shanghai stock market on a large scale as required, boosting investor confidence and warming the Shanghai stock market.

However, this unusual operation was noticed by the China Securities Regulatory Commission (CSRC). A few days later, the CSRC issued the “Management Measures for Proprietary Business of Securities Firms,” which included several prohibitions, one of which forbade the frequent and large-scale buying and selling of a certain type or class of securities within a certain period of time, causing abnormal market price movements. After an investigation was launched, Kan Zhidong was dismissed and severely reprimanded. Some media labelled him a speculator, while others said he was made a scapegoat for the leadership. After leaving Shenwan Guotai, Kan Zhidong’s career went through some changes; he moved south to join Shenzhen Innovation Investment Company (Shenzhen Venture Capital). In 1999, under his leadership, Shenzhen Venture Capital earned over 20 million yuan in just three months of operation, and by the end of the same year, it was able to distribute dividends, surprising and touching many shareholders who had never expected a government-affiliated institution to pay dividends. What was even more incredible to them was that Shenzhen Venture Capital earned nearly one billion yuan the following year.

Whether at Shenwan or now at Shenzhen Venture Capital, Kan Zhidong achieved remarkable success by adopting a different approach to project advancement. After taking charge of Shenwan, he brought back old securities professionals from before the founding of the PRC to work on business operations. During the merger of Shenwan and Guotai, he established a fair system. Previously, Guotai Securities’ reward system was based entirely on the whims of the leaders – a promise of an apartment from a happy leader could mean an actual apartment and the amount of bonus announced would be granted as such, resulting in some individuals receiving several apartments while the majority of the staff had low compensation. He changed this mechanism. At the inception of Shenzhen Venture Capital, he neither pushed projects nor personnel; every project from initiation to investment was subject to strict procedures, with many projects undergoing on-site inspections and organizing company personnel to learn from Silicon Valley in the United States, making Shenzhen Venture Capital the most dazzling government-operated VC of its time. In 2002, Kan was urgently called upon to rescue Southern Securities, which was on the brink of bankruptcy. Facing a ledger with losses of over 2 billion, Kan attempted to start by saving costs, but as president, he constantly faced resistance from the management layer. Every time he tried to make changes, the chairman would hinder him, and the conservative forces within the company’s management always blocked his reforms. Eventually, a complaint letter even reached the city leaders, who had been replaced by then. Faced with the company’s internal factionalism, Kan exerted all his efforts in vain. He submitted his resignation, which was accepted after his repeated requests.

However, Southern Securities went bankrupt a month after his departure. Later, due to Southern Securities’ manipulation of the stock price of Harbin Aircraft Industry Group, Kan Zhidong was imprisoned, a situation that had existed before his tenure at Southern Securities. He was first detained and then sent to a detention centre. Though his time there was short, he remembered the cold weather on his first day, with temperatures around four to five degrees Celsius, being ordered by a guard to strip naked for a physical examination in a breezy corridor. Hesitant about the situation, another guard harshly scolded him, telling him to squat down, as if to say, “Do you still think you’re some kind of CEO?” From a high-ranking official to a prison inmate, he also shared another unknown aspect of life in the detention centre, which might interest readers. Later, with the help of friends, he was released on bail and ultimately acquitted. The book covers these experiences.

Perhaps due to the indescribable experiences in the secondary market, Kan Zhidong later established Dongfang Huifu, focusing more on the primary market, achieving certain successes in the fields of wind energy and new energy, which have broad prospects.