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Remaining stable a long-term objective

By Lan Xiang (China Daily)
Updated: 2008-09-27 11:49

Investors monitors price fluctuations at a securities house in Yichang, Hubei province. [China Daily]

The central government's recent move to rescue the faltering equity market has eased investors' tightened nerves on the relentless slumps in A-shares. But insiders said the immature structure of China's capital market would undergo tremendous tests both from home and abroad before getting full-fledged.

As of early September this year, mainland stock market has lost 59 percent of its value and $2.86 trillion of its capitalization, according to Wall Street Journal's reports. And investors' clamoring for measures to reverse the losses wasn't echoed by the authorities until recently, when a support package was released by the government to prevent further stock declines.

The asymmetry between supply and demand in the capital market, rather than the global economy downturn, is the major reason why mainland stocks suffered such a severe turbulence, analysts pointed out.

China's State-owned banks remain sitting on the largest resources and dominating the finance channel in the country, which severely hinders the development of capital market in a healthy, and market-oriented way if given banks' clumsy structures, said Liu Jing, professor of accounting and finance at the Cheung Kong Graduate School of Business.

"Chinese capital market is still in its infancy, although it has already made rapid progression since its birth," Liu added.

The country's capital market emerged in late 1970s, when China commenced its reform and opening-up policy, which triggered the gradual transformation of the traditional planned economy to the modern market economy system.

With the expanding population of investors and rising number of securities issues, two stock exchanges based in Shanghai and Shenzhen were open to the public respectively in late 1990. Before that, the treasury bonds were resumed to issue in 1981, corporate and financial bonds subsequently emerged afterwards.

A capital market gradually formed then. And the Security Law came into effect since 1999.

According to China Securities and Futures Statistical Yearbook 2007, the number of listed companies has climbed from 1,400 in 2006 to about 1,600 in 2007. However, the stock market experienced four-year turbulence since 2001, thanks to the system defects.

The strict oversee from the regulators to the market has stifled the marketisation steps of capital market to connect with their global counterparts, analysts said.

But facing the unfolding global capitalist crisis, the restricted Chinese capital market helped cushion crash somewhat.

The ripple effect of Wall Street's carnage has given a blow to this emerging market, but not as heavy as we expected, analysts said.

"We have limited exposure to global financial and capital market, the external turbulence just caused a psychological panic," Liu said, but he added that the regulators should ease the restricted supply of financial products to give financial institutions and individual investors more freedom and choices.

It's the normal way to establish a healthy and mature market in the long-run, Liu said.

According to a report compiled by the Renmin Univeristy and the Shanghai Securities Journal in 2007, mainland capital market is expected to become one of the most vital and the largest asset trading market in the world by 2020, when the market value is to top 60 trillion yuan ($8.76 trillion) to 80 trillion yuan.

By 2020, China's local currency will become one of the three major international reserves, sending Chinese capital market and its financial market to become one of the global financial centers, the report estimated.

In addition, Shang Fulin, chairman of China Securities Regulatory Commission, said recently in a press briefing, maintaining stability is a long-term objective for Chinese capital market, but the short-term strategy should focus on preventing vulnerabilities in trading through continuous market reform and innovation.

As for the major task for China's securities watchdog in the next half, Shang said it would emphasis on easing market risks. He noted that yet China's stock indices saw a sharp fall in the first six months, the fundamentals of the country's capital market remained healthy.

"While trying to bolster the stability of the capital market and its healthy development, the inner market mechanism also needs to be polished. We should expand the channels for long-term funds, and raise shareholders' risk awareness of laws," Shang said.

Economists also agreed that diversified financial products, increasing finance and investment channels would be crucial for the progression of China's capital market.

"It will take about 20 to 30 years for the transformation of the capital market in China from an emerging and immature market into a fully-mature and self-regulated one," Liu said.

At the 17th CPC National Congress, President Hu Jintao said that China's GDP would be doubled by 2020 from 2000, to reach 35.78 trillion yuan then.

To achieve that goal from capital market's perspective, marketization with less government intervention is the only way leading us there, Liu noted.