Constitutional Amendment Is Underway in China

Socialist China has embarked on amending the nation`s constitution to acknowledge capitalist rights, such as private ownership, and expanded rights of private enterprises. China showed its efforts in market liberalization last month and allowed for foreign investors to participate in local stock markets in limited terms. The Financial Times reported yesterday that China had set up a secret top-level body to draft sweeping changes to its constitution, which would be presented to China`s 10th National People`s Congress in March next year. The Financial Times called the recent developments in China as the most fundamental changes since the 1949 Communist Revolution. This would be a benchmark to measure the future direction of Hu Jintao, inaugurated in March this year as the new president of China, forecast the FT. The constitutional changes will be confirmed through intra-party meetings, decision-making procedures on different levels, and Central Committee of the Communist Party.

Protection of Private Ownership

Chapter 12 of China`s Constitution described as saying “public property of Socialism is sacred and inviolable“, but there is no article for protection of rights of private enterprises or private ownership.

The Financial Times projected that “When private property ownership is protected, private enterprises will drive economic development and job creation in China.” Private sector sales totaled 138 billion dollars in 2001, a 50 % growth from 1999. During that period, as many as 5.5 million jobs were created. IPOs are also rapidly growing in China. According to a recent report by the Asian Wall Street Journal (AWSJ), out of over 2000 companies, which applied for IPOs at Chinese securities authorities, 40% comprised for private enterprises. Most companies, among listed 1200, have been state-owned.

China`s measures to protect private ownership are expected to curb capital flight in the future. During the period between 1998 and 2000, 50 to 60 billion dollars are estimated to have flown out of China.

Opening Capital Markets

For the fist time in its history, the Chinese government permitted foreign securities brokerages´ transaction in Yuan-denominated equities last month. This is part of China`s commitment to stock market liberalization. In compliance with Declaration for Qualified Foreign Institutional Investor (QFII), adopted in November last year, the China Securities Regulatory Commission (CSRC) has opened the local only stock market to UBS Warburg of Switzerland and Nomura Securities of Japan. Before, foreigners have been free to foreigners-only shares, denominated either in USD or in Hong Kong dollar.

Restrictions still exist: Invested money cannot be withdrawn with one year after investment and investment in a company cannot exceed 10%. Nevertheless, experts have highly estimated China`s gradual efforts in opening the nation`s capital markets to the outside world. China`s stock markets are expected to open nor only for institutional investors but to individuals by 2006. In 2001, when China gained membership in the World Trade Organization (WTO), China made an official commitment to complete market opening within five years to come.

Seung-Jin Kim sarafina@donga.com