China's stock market cannot serve as an economic barometer unless more non-State companies are listed, an article in China Business said.

Although the country's gross domestic product (GDP) has achieved a stable 7-8 per cent growth rate in recent years, the performance of the stock market is capricious.

The benchmark Shanghai Composite Index plummeted from a record 2245.4 point high in mid-2001 to a five-year low at 1320.6 points earlier this month, and then staged a stunning rally, rising by a startling 10 per cent within two weeks.

The fickle stock market has failed to mirror the country's overall economic development, the article noted.

As an economic barometer, the stock market should reflect the most vibrant part of the national economy, the article stressed.

After implementing the opening-up and reform policy for more than two decades, China's economic and ownership structure have undergone tremendous change. Although the State sector still dominates the economy, its share has diminished while the non-State sector has made a great leap forward.

Statistics show that the share of non-State capital in overall investment has soared from 35.9 per cent in 1996 to 44.6 per cent in 2001.

However, the great structural changes in the economy have failed to be reflected in the capital market. State-owned enterprises (SOE) still dominate China's stock markets, accounting for 90 per cent of the 1,200 listed companies in its two bourses. Even worse, some listed SOEs are of poor quality, with a large number making major losses.

To drive up their stock prices, some even resort to falsifying their balance sheets to cheat investors. As a result, the stock markets have been mockingly called listed SOEs' "third financing bonanza," behind the State budget and bank loans, the article said.

In the meantime, China's non-State sectors are starved of capital because of the limited financing channels available to them.

To further develop the non-State economy these companies must gain greater access to capital markets.

Currently, there are two obstacles to the listing of non-State companies, the article said.

First, the problem lies with the non-State companies themselves. At present, most private companies' corporate governance falls far short of the listing requirements set by the market regulator.

For instance, many Chinese private firms are still plagued by family-run management styles.

And criminal acts by some listed private companies, such as falsifying accounts to cover losses or exaggerating their performance, has sparked serious concerns about the quality of non-State firms.

And the fear of strict public scrutiny and sharing of profits with other investors after listing also deters some private enterprises from going public.

Second, the current listing mechanism disadvantages non-State companies, the article said.

According to present rules, every underwriter can only handle a certain number of enterprises (usually two to eight) applying for initial public offering (IPO), and only after one enterprise IPO is approved can the underwriter apply for the next.

Market insiders have criticized the rule, denouncing it as a hurdle to the development of the stock market and calling for its abolition to enable every eligible firm to list.

It is reported that there are now more than 800 enterprises planning to list on the domestic A-share market that have entered the coaching period - that is, the period required by the regulator to streamline the candidate firm's corporate governance.

Restrained by the current rule, it would take years to list all these companies, testing their patience and leading many to turn to other options.

The delay partly explains why the overseas listing fever among non-State companies has emerged in recent years, the article said.

According to incomplete statistics, about 20 mainland private firms were listed in Hong Kong last year, while the number of firms planning to follow suit exceeds 1,000.

As for the underwriters, they are more willing to underwrite SOEs.

In terms of scale, most SOEs are larger than private firms, which means more underwriting fees, the article noted.

And given the fixed listing quotas an underwriter faces, they naturally prefer to underwrite larger SOEs rather than private firms.

The non-State sector is becoming an important engine for national economic growth but it has not been given proper access to domestic capital markets so far because of its own problems and defects in the present system.

It is high time the situation is improved, according to the article.

And the prospects for reform are encouraging.

The report to the 16th National Congress of the Communist Party of China held in November pledged that the State will gradually pull out of economic sectors that are not closely related to the security of the national economy, sending clear signals to non-State enterprises that boom times are ahead.

Buoyed by such a favourable policy, the non-State sector is expected to make headway in its development and play an important role in the country's capital market, the article concluded.