An article in the Beijing-based Economic Daily says many problems should be tackled in the country's fledgling stock market in order to ensure its sound long-term development.

The piece, which is part of a research project analyzing the role played by the stock market in the country's economy, quoted a saying that uncertainty looms over the stock market in China because of the lingering bearish market and its current so-called "marginalized'' role in business financing.

However, the author Cheng Siwei, vice-chairman of the Standing Committee of the National People's Congress, held that the stock market did achieve notable yields since it was launched over a decade ago.

And the track of its growth indicates that it is both possible and necessary for the country to use advanced methods of management, like on stock-holding system and the security market, from developed countries to run its economy, stressed Cheng.

Nevertheless, compared with mature stock markets in other countries, the security market in China still has many problems waiting to be solved, said the article.

Under current system, the shares of listed companies are separately held by the State, companies and individuals. The first two categories are not allowed to be traded in the market, cutting the tradable shares down to one third of the total.

At the same time, the stock market remains a fairly small one in proportion to the nation's economic scale, although it has been growing swiftly for years.

As a result, the market's role as the thermometer of the economy is dampened.

Similarly, the market is vulnerable to price manipulation and sharp fluctuations.

Since the prices of the relatively "scarce'' stock are mostly decided by the relations between the supply and demand rather than by its real value, the manipulators could easily make profits if they have enough capital to push the prices up or slash them down.

By making up "hot'' stocks in the market, the manipulators give false impressions to other investors, most of whom are less-informed small investors, to make blind decisions. In this case, the investors' interests are hurt, and market order is also damaged.

The large proportion of non-tradable shares also poses challenge to corporate management in listed companies.

Since the State hold majority shares of many listed companies and there is no State representative at the company, the management level is almost free from any effective supervision by shareholders and the general shareholders' meeting is often no more than a rubber stamp.

As a result, the release of false information, cheating, market manipulation and other illegal activities sometimes take place in listed companies.

According to the nation's Securities Law, stocks can only be traded in spot transaction. This is also a problem in the stock market, said the article.

Such limits on stock deals make investors rush into the market once there is any signal showing the price may rise. Therefore, both the prices of most stocks and the stock indices are in an upward curve.

When the stock market remains bearish for some time, investors either are stuck in the market or have to sell out stocks at a loss. During such periods, the market becomes especially inactive because most investors are unable or unwilling to make any deals, causing the market unable to revive without outside assistance.

Ample proof could be found that one of the major reasons causing stock price fluctuation is the government policy and the opinions of officials.

For example, the top 25 records of highest and lowest daily return of stocks between 1991 and 2001 "coincide'' with issuing of major policies or the release of official information.

One outcome of this is that many investors, especially small investors, develop a reliance on policies or government information when they are making investment decisions. Some of them even come to believe that the government will make efforts to lift the price, pointed out the article.

This also promotes overt speculation in the market, warned the article.

To judge whether or not a market is subject to overt speculation, there are two major standards: whether the investors treasures the stock's current price or long-term value; whether the market is subject to the law that revenue always equals risks.

An analysis to the revenues and risks of stocks between January 1998 and December 2000 indicates that stocks of listed companies that have a poor financial record and inferior business revenue have the highest price/earnings ratio (the ratio of the stock price to the earnings of each share) and the stocks of companies of good performance got lowest.

On Chinese stock markets, most investment was done in a fairly short term, said the article.

According to a survey as part of the research project, on average, about 76.3 per cent of investors will sell a stock they bought within six months and 27 per cent will even sell within one month.

On the one hand, small investors cannot stand the risks of the long-term investment. On the other hand, the financial institutions, whose capital was pooled with high costs, would also want to be rewarded quickly.

The last, but not the least important problem, is that the country's Securities Law must be adapted to the current situation, said the article.

Drafted and passed during the period of the Asian financial crisis, the law was mainly aimed at preventing financial risks. As the stock market develops, issues that are not mentioned or governed in the law emerge, making the law in great need of revision.

The article called for further study about the clauses on the same issues in the Securities Law with the Criminal Law, the Civil Law, the Corporate Law and the Trust Law. Revision should be made if they are contradictory to each other.

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