In a bear grip for more than two years, China's stock market is trapped in a vicious circle: poor corporate quality and transparency, increasing fraud, and weaker investor confidence.

The crisis, a result of historic roots as well as new problems in the reforming process, has triggered another round of intense debate among scholars, securities practitioners and officials - who should the stock market be serving, and whether more drastic and systematic reforms are needed to totally rebuild the market.

The repositioning is necessary, most academics agree.

The bourses have long been shouldering a misplaced task - to obtain funding for State-owned enterprises (SOEs) and help them grow, said Song Fengming, director of the Department of Finance and International Trade at the Tsinghua University.

That, a result of the planned economy, should be changed in the market reform, he said.

The dominance of non-tradable State-controlled holdings in listed companies often leads to unequal information access and decision-making rights between the major shareholders and smaller ones. The consequences are unfair affiliated trade, infringement on the interest of small investors and lack of transparency.

The twisted shareholding structure also means that stock prices do not reflect the real value of the listed companies.

It is rational for the government to try to seek maintenance and appreciation of State-owned assets, but the way it is done needs a lot of rethinking, said Song.

Administrative interference to protect the prices of SOE stocks may have its short-term effect, but is never a long-term solution.

On the contrary, lack of information transparency and credit construction hurt investor confidence and make the market less attractive.

The interests of investors is often neglected, said Han Zhiguo, head of the Banghe Fortune Research Institute, adding that surveys have found that most investors in the bourses suffered losses over the past two years - which makes people much less willing to trade.

The flaws in the experiment of the sell-down of State-holdings and expansion of the A share market have placed the small investors at a more disadvantaged position, he said.

However, other market participants also have their complaints. Listing applicants say the waiting period is too long while brokerages and intermediaries saw their income declining as trade became thinner.

Zhu Li, president of China Galaxy Securities, said that the stock market should receive more attention from the authorities. The government should encourage more companies to get funding from direct investment and open more channels of fund raising, he added.

But it was the securities houses themselves, along with many listed companies, which are inefficient and waste market resources, retort critics.

Efficiency, competition and innovation are the new principles the stock market should adopt in the future, said an expert in an article published in China Securities Journal yesterday.

Monopolies exist in the systems of share issues, investment banking, market entry of the securities business, stock exchange management as well as new product approval.

"More scholars and stock market participants have realized the negative impact of simply stressing the fund-raising function of the bourses," said Song Fengming.

(China Daily September 4, 2003)