One day in the early 1990s, two managers of State-owned enterprises (SOEs) met while applying to issue shares to the public.

"You shouldn't have come here," one said. "You can still pay your workers, but I have to borrow money from banks. My factory needs money more urgently than yours."

Such a dialogue helps explain how and why some domestic companies go public.

Today, when we watch helplessly as the index repeatedly nosedives to record lows it broke 1,000 points benchmark on Monday when the stock market is a place of heartache for China's 70 million stock investors, and when regulators are bombarded by public criticism for incompetence, we must remember the landmine was planted more than a dozen years ago. The effect of what we do now may be felt decades later.

Although a strong rebound happened yesterday to send the index to 1,115, on reports that the central bank would pour funds to brokerages, how long the rebound can be sustained remains the question.

Even if such reports were true, the rescue measures may not solve the fundamental problem in the stock market.

The quagmire trapping the market now is those poor-quality firms that were selected to go public years ago have lost credibility, smashed investors' confidence and sent the market into the doldrums.

The painful answer to these fatal problems is restructuring. Better quality and more attractive products must be provided for investors. Otherwise, they have no reason to stick around.

It took a long time for China to learn this lesson. Some people accused China's 15-year-old stock market of being positioned incorrectly at the very beginning. In the 1990s, it was the general consensus that China's stock market was built to help push the reform of SOEs.

But such a start violated the most important principle in the stock market fairness. Many well-performing private firms and foreign-funded firms were kept outside of the market.

Even the goal of pushing forward SOE reform was distorted later. Many SOEs went public with only one goal money.

When I interviewed a steel official in the mid-1990s about the listing of steel companies, he told me: "The steel firms are eager to go public. In the past, they borrowed from banks and didn't pay the money back. But now they know they have to pay it back since the State banks are being commercialized. Selling shares is a good way forward."

Such remarks were understandable 10 years ago when the stock market was such a new concept in China that few people really understood its operating principles, while a big number of SOEs were in difficulty and needed money to feed their employees.

With too many SOEs anxious to float shares, a quota system was introduced at the very beginning, under which share issuance quotas were distributed to every province, autonomous region and industry. SOE managers queued outside the door of their higher authorities to fight for a quota. Under-the-table transactions happened time and time again.

Such a practice led to disaster: among the nearly 1,400 listed companies, over 1,000 were listed in the quota period which ended three years ago. That means a large number of unqualified firms went public without passing strict tests.

This, plus ineffective supervision, has led to rampant irregularities. These include fabricated financial statements in the stock market. Senior regulators have admitted the market has become a place for "fake products" while investors don't know whom to trust.

But it is investors who are paying the price some reports say China's 70 million investors have lost a total of 2 trillion yuan (US$240 billion) in the past six years. Companies have paid a price too. They have lost the opportunity to raise more cash in the marketplace as initial public offerings and other forms of financing have almost been suspended following the market's prolonged bearish performance.

Partly thanks to these losses, the government has gradually realized the seriousness of the situation. Even Premier Wen Jiabao has admitted that improving the quality of listed firms should be the priority when reviving the lacklustre stock market.

But how to restructure the market is a great challenge. "We need great wisdom to do that," said Vice- Finance Minister Lou Jiwei at a forum earlier this month.

Many experts have proposed solutions by introducing some more well-performing firms and improve existing ones.

To add new high quality products to the stock market, measures include improving the share issuance management system, creating conditions for well-performing firms to go public, and introducing some mainland firms listed in Hong Kong back to the mainland market.

To improve existing companies, strengthening supervision of listed companies is a must. A system to de-list unqualified firms should be strengthened while new standards, including corporate governance, should be applied when assessing the work of senior managers in listed firms.

The recently launched experiment of selling non-tradable shares is also a crucial step in this direction.

The reform allows some selected listed companies to list their non-tradable shares owned by the State or legal persons after giving a certain amount of compensation to holders of tradable shares.

The reform will allow investors to have more say in listed firms and thus force the companies to improve corporate governance.

However, improving the qualifications of listed firms will be a long battle and we cannot expect to accomplish such a tough task quickly.

What we need now is a lot more action. Otherwise we just cannot imagine what the stock market will be like some years from now.