Equities regain ground on govt reassurances

Regulations will be used to curb volatility, says top official

Share prices rose on Friday after the government signaled it will curb overcapacity in industries that have been dragging down economic growth.

The benchmark Shanghai Composite Index gained 1.25 percent to close at 2,916.56 points while the Shenzhen Component Index jumped by 1.36 percent.

The Economic Information Daily reported on Friday that the government will provide 100 billion yuan ($15 billion) a year to help reduce capacity in the coal and steel sectors.

Market sentiment also improved after Vice-President Li Yuanchao sought to reassure investors that the government would use regulations to curb volatility in a market that was "not yet mature".

"An excessively fluctuating market is a market of speculation where only a few will gain the most benefit, when most people suffer," Li, who is attending the World Economic Forum in Davos, Switzerland, said in an interview with Bloomberg.

China Securities Regulatory Commission Vice-Chairman Fang Xinghai told CNN at Davos that market volatility will be part of the "new normal" as China continues to transition from an economy based on investment and exports to one driven by consumption.

He estimated that the current economic transition would go on for another three to five years.

Fang said Chinese markets are more volatile than developed markets because they are dominated by individual investors who lack the experience of large institutional investors.

China introduced a circuit breaker mechanism at the start of this year to protect small investors from big market swings. But instead of offering protection, it constrained liquidity further.

Fang said that having a circuit breaker was "not an appropriate policy for China", and that the market regulator would intervene to allow markets to fluctuate more naturally.

"Li's comments show that China is determined to strengthen laws and regulations to check illegal activities and market manipulation," said Deng Haiqing, chief economist at JZ Securities Co.

Liu Jipeng, director of the Capital Research Center at the China University of Political Science and Law, said that regulators used to focus more on the scrutiny and approval of initial public offerings.

But now they need to have strengthen regulations for companies after they list or delist.

"The regulators also need to improve the systematic design of the A-share market, such as limiting share sales by major shareholders and ways to activate large-capitalization stocks such as China's four large State-owned banks," said Liu.

The China Securities Regulatory Commission said on Friday that the Securities Association of China will introduce self-regulatory guidelines for sponsor institutions after a review of advance compensation for sponsor institutions was carried out in November.

Bloomberg and CNN contributed to this story.