WASHINGTON, Feb. 7 (UPI) -- When the largest dictatorship in the world reverses course even on a trivial matter, it is worth taking notice. When it reverses course on an issue that goes to the core of the regime, the shift could be seismic. Such a tectonic adjustment may be taking place deep in the ground of mainland China, meaning it is time for investors to adjust their thinking, and move their feet.
On Jan. 13, following the close of trading on the Shanghai stock market, a short item appeared on the front page of the Financial Times of London, headlined "China to launch program of 'Western' reforms." Like so many important articles out of China these days, it was written by James Kynge.
Kynge's scoop, obtained in an interview with a senior party official, outlined a plan by the new Chinese Politburo (which itself experienced a turnover of more than half its seats last December) to hold elections in Shenzhen province, home of the special economic zone that launched China's fling with capitalism, albeit undemocratic capitalism, a generation ago.
Of course, China has had elections at all levels for decades now, in the sense that Russia held them in the 1970s, and such countries as Cuba and Iraq do even today: Everyone gets to choose between one candidate, chosen by the official government party. What makes the Shenzhen experiment revolutionary, as described by the city's mayor, Yu Youjun, is that people will be able to nominate and vote for competing candidates.
Furthermore, the elections are set to take place as early as March.
A tentative experiment, to be sure. But it's an experiment in a very different direction than was allowed for more than a decade under China's ancien regime.
One good means of judging the seriousness of such moves is to witness how local journalists, officials, and investors respond. Judging by this standard, the move in China could be significant.
On Jan. 14, trading opened with a burst in Shanghai, the market jumping 3 percent in the first few minutes of trading (along with a rise in the exchange rate of the renminbi yuan). By the end of the day, stocks were up 5 percent, close to 6.5 percent in U.S. dollar terms, on nearly double the exchange's usual volume.
Western press coverage on both events, outside the FT, was muted. A news search turned up no items on either the democracy initiative or the market's surge on Bloomberg, CNBC, The New York Times, or Dow-Jones news service.
A Lexis-Nexis news search three days later turned up no news connecting the political play with the market move. E-mail messages to each of those news organs turned up no items on two and no response from two others.
According to a Shanghai stock trader, however, the two events were closely connected. "Traders were talking about the item all day on the floor," this broker commented, "particularly because in its comments about the story that day, the government connected the democracy opening with the party's anti-corruption drive."
Confirmation of this view surged in late January as coverage of the government's plan drew rave editorials in the local press -- even in Hong Kong, where recent government moves to restrict the press have moved in the opposite direction from such glasnost in recent weeks. No fewer than three members of the new Politburo spoke out about the Shenzhen experiment and its importance.
Among the leaders most vocal about the policy was Hu Jintao -- the new party leader and hence, de facto head of state. Hu used his address on the lunar new year, the rough equivalent of a State of the Union address, to comment at a Spring Festival on "multiparty cooperation." Though held by the Central Committee, the conference included several of China's small democratic parties, and a number of intellectuals without party affiliation. Hu described the evolution to true democracy as, in his view, "the key to economic development."
That connection is important. Notably, Hu has advanced the policy as essential for dealing "not merely with the symptoms" of corruption, through bureaucratic drives that are a staple of all communist and military regimes, but for "fighting the root causes," according to a statement by China's Communist Party.
The same anti-corruption theme was voiced in a Jan. 14 broadcast by Wu Guanzheng, also picked up and translated by alert journalists in the United Kingdom, but the British Broadcast Corp. for one.
Another influential who supports the policy is Zeng Qinghong, a protegé of former Party Chairman (and still, note, head of the military commission) Jiang Zemin. In fact, according to some, Zeng, newly appointed dean of the party school and a member of the ruling Politburo in December, is not merely a supporter but a principal architect of the experiment.
Late in January, the Communist Party ideology journal carried a vision statement, later translated and reposted by the BBC Monitoring Service. The vision statement includes a new formulation on "socialist democracy," implicitly tying political "competition" to economic markets. The suggestion is, the Shenzhen move has not only broad support among the politburo members, but fairly deep support as well, representing a rethink by the leadership and the party's intellectual elite.
Indeed -- revealingly -- Hu's party organs have already begun to tout the results from other provinces. On Jan. 29, the New China News Agency carried a story about a competitive election in Nanchang, "Growing interest in village-level elections, new campaign tool reported." Two days earlier, the agency also publicized the growing practice of allowing democratic elections for union leaders. If the politburo fears anything as much as general political democracy, it's an authentic unionism, which the party recognizes was behind the conversion of former communist states in Poland and, ultimately, the whole Soviet empire.
It is difficult, in fact, to locate opponents of the policy. One can count on it: They exist. So far, however, those concerned above all else about "stability," the talisman phrase of the party's anti-democratic reaction in the 1990s, have been noticeably silent. That silence suggests not that the party's old guard will go away without a fight, but that, at least for the time being, they read it as unprofitable and even dangerous to question the new policy.
Trading all this will be difficult for investors for two reasons. First, a surge in democracy is not always immediately good for markets. When corruption does come out, as in Mexico in the 1990s, often the first response is a retrenchment by markets.
Second, there is sure to be a counter-effort by China's anti-democratic forces, still probably a majority of the economic elites and surely a majority among party rank and file, who (unlike the politburo members) will have to compete for their positions in the near term if Shenzhen works and the example is extended to other cities and provinces.
At the very least, however, it's prudent to cover any short positions in China, and, perhaps, to begin investing selectively in sectors of the economy that are clean, or in smaller companies that will benefit from any Enron-like disclosures regarding the country's giant firms dominated by former party and military officials.
It will take some months, and some real political scrapping, for anyone to know whether Hu Jintao, is indeed the Chinese Gorbachev. As that analogy suggests, tampering with democratic ideals can lead to unintended results, sometimes at a pace none of the architects had envisioned. By the time Shenzhen votes, the aggressive and far-sighted will already be partly invested.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group, dcfund.net. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)
