Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise."
The investigation into newly listed ride-hailing giant Didi Global is the latest in an ongoing clash between China's tech sector and regulators as the state brutally exerts control after years of hands-off management.
Much of the drama has played out in the stock market, where Ant Group last year saw its initial public offering pulled only hours before trading was scheduled to start, while Didi had already started trading in New York when the regulator blew the whistle.
All the more reason to reflect on the recent passing of Yang Huaiding, often cited as the first stock market millionaire in China's reform era, a very different world when the nation was alive with possibilities.
Upon leaving his job as a steelworker in the late 1980s, Yang started trading stocks at a time when most Chinese had never heard of them. After the first share issuance was approved in late 1979, state-owned enterprises across the country started experimenting with distributing stock, too. Over the next decade, there was little standardization and trading was haphazard, with formal exchanges appearing only in 1990.
Yang timed his career switch well. Those early days were full of volatility, and some investors won big. Many entrepreneurs made their first serious money by buying up staff shares, then trading them on the open market. With share value still poorly understood, many stockholders were happy just to receive cash for the paper tickets their bosses called shares.
As foreign investment started to flow in the early 1990s, few activities exposed how quickly Chinese-style communism was changing better than workers trading on the stock market. Share fever was everywhere, with trading halls filled with hundreds of small investors like Yang trying to make it big, giving rise to the mantra, "To get rich is glorious."
Still, it was a period of innovation and experimentation, driving unwieldy state companies to adopt standard structures that could engage with foreign entities. The state also learned how it could exercise control by becoming a shareholder.
When Yang was interviewed by Agence France-Presse in 1992, markets were overseen by the People's Bank of China. The central bank's inept handling of IPOs in Shenzhen triggered a riot that was the catalyst for the creation of a dedicated securities market regulator. In 1992, the Shenzhen exchange traded a total of 43 billion yuan ($6.63 billion) in shares over the entire year; last month, the average daily turnover in Shenzhen was 555 billion yuan.
"Share prices now are divorced from the share value," Yang was quoted as saying, which could almost be the motto for the decades that followed, when share prices often had little connection to underlying performance.
All too often, Chinese markets are overtaken by bouts of frenzied speculation, leading to a series of booms and busts every five to six years. Much has changed since Yang's early days, but some things have stayed the same.
With such regular booms and busts, long-term investing has generally not paid off and short-term speculation dominates. Retail investing has dramatically changed, though, with trading all online. Of the nearly 200 million estimated online trading accounts, active accounts probably number a tenth of that. The real money is controlled by private funds -- and some very big private accounts. Retail investors may add fuel to the fire, but the idea of China as a nation of stock investors is wrong.
The success of Yang and others like him certainly helped promote the markets in the early days, but it soon became clear that there simply was not any way back to the wild early days. Corporatization via share issuance was an essential step to preparing Chinese businesses for bigger things.
Such onshore "big hands" played no part in the even bigger issuance of Chinese companies happening in Hong Kong and New York during the 1990s. Indeed, it was the very real size limitations, coupled with official cautiousness, that led to the outsourcing of the market to foreign bourses. That pattern continues to this day, with Didi being the latest to list in the U.S.
Called an experiment in China, as if the outcome and long-term viability was never fully settled, share issuance has produced some incredible results and made plenty of people rich. But China's financial system still fails to allocate capital efficiently. There is still too much money chasing policy objectives or hot stocks, and Yang's observation about prices and valuations remains all too true.
When the Chinese Communist Party ascended to power 70 years ago, it closed down the country's stock exchanges and kicked the capitalists out. The tactics now are very different. The stock market is not the decisive factor in the economy, but as long as it can help serve the party, then the experiment will continue -- albeit with Chinese characteristics.
The drama around Ant, Didi and other tech companies is part and parcel of those characteristics. Being listed, or planning a listing, cannot insulate a company from the will of the party. Instead, investors may want to ask tougher questions of Chinese tech companies about how to better navigate the very real dangers that lurk in plain sight.