There are signs, however, that instead of enhancing management, listed companies may continue the large-scale pooling of money from the market, pushing down prices in the minnow market. This process could result in large shareholders jeopardizing the interests of small investors.

The pace and methods adopted in the share-merger reform should therefore be re-examined to find ways to protect the interest of small investors.

Given the small scale of the Chinese stock market, issuance of new shares and debts are often disastrous to the market, driving down stock prices. Currently, listed companies are prevented from expanding their share scales to ensure the smooth implementation of the share-merger reform. They are required primarily to complete the reform before they go on to refinance.

Consequently, new shares or debts may be hastily issued once the share-merger reform comes to a close.

Currently eight of the 42 pilot companies in the second round of the reform have declared they will issue more shares or corporate debts. Although other companies have not submitted their plans, it is predicted that many of them, providing they are qualified, will soon put forward their refinancing schemes.

It is estimated that within the first year after the reform, more than half of the 42 companies may apply for issuing new shares or debts.

In the share-merger reform, the controlling shareholders have been forced to sacrifice some of their interests to benefit small investors to ensure the reform land successfully. As the reform comes to a temporary close, they may consider resorting to refinancing to make up for previous losses.

The prices of the Chinese stocks are on the whole above the value of the listed companies. This also prompts the listed companies to issue new shares or debts in order that large shareholders can profit from this.

Although the stock indices of the domestic market have slumped to a low level, the overall prices remain higher than their real value when performances of listed companies are taken into consideration. This provides conditions for large shareholders to take advantage of the high prices by issuing new shares or debts to benefit themselves.

Market regulators have been lenient to under-the-counter deals and manipulation of the market, which has led to disorder of the pricing regime and created room for the large shareholders to act to their advantage.

It should be noted that the refinancing preference has little to do with the current share-merger reform. It happens primarily when stock prices rise significantly higher than real corporate value. Those companies whose prices have failed to live up to their true value are more likely to suspend their refinancing plans. The China Minsheng Bank, for example, has given up its initial public offering in Hong Kong due to the expected low prices.

This is also a trend in the international markets. Once stock bubbles surface, listed companies would become more enthusiastic about refinance in the market. When the market cools down, the refinancing scale would narrow down, with some companies potentially trying to buy back their stocks from the market.

Given the loose market regulation, the so-called "malicious refinancing" by private large shareholders of listed firms would seriously affect the asset quality of the companies.

In many cases, those large shareholders resort to tricky affiliated transactions to transfer the money pooled from refinancing to their own pockets. With quality assets taken away, the listed firms would become hollow inside and be reduced to "dust bins" of the controlling shareholders.

Although they would suffer from the diminishing stock values, those controlling shareholders would gain huge benefits from the affiliated deals that are more than enough to make up for their losses.

Before the share-merger reform was launched, many large shareholders controlled an overwhelming proportion of the corporate shares and were not allowed to sell them to the market unconstrained.

After the reform, large shareholders would not be limited to selling the shares they hold to the market before the market is informed of their secretive deals of money transfers. As a result, the listed firms may be dropped by the market, but the controlling shareholders would have significantly benefited from refinancing.

The management of State-controlled listed firms may also prefer to refinance as much as possible from the market in the wake of the share-merger reform.

About two-thirds of the Chinese listed companies are State-controlled. The larger the scale the companies become, the more personal benefits their managers receive. As a result, no matter how the prices of the firms fluctuate, the managers always prefer to issue new shares or debts to expand the scale of their companies.

After the share-merger reform is completed, the controlling power of the largest State shareholders would weaken and the managers would have more rein to support their refinancing drive.

To curb the wild irregularities, laws must be enforced to crack down on the rule breakers.

Under the current regulation regime, the controlling shareholders can reap huge profits from listed companies in illegal deals while the concerned parties, including board members and managers of the companies, shoulder few responsibilities. However, if individuals obtain similar amounts of money through taking bribes, embezzlement or fraud, they may receive capital punishment.

In a mature market, regulators would mete out severe punishment on those who infringe upon public interest. Only in this way can we prevent the stock market from becoming a hotbed for fraud and manipulation.

To improve the situation, it is also of vital importance to establish sound corporate governance structures in listed companies on the heels of the share-merger reform. Otherwise, the companies may plunge into an abyss of plunder and exploitation.

The reform in the property rights of State firms is also a must. Although the stock market does not spurn State firms, it should be primarily a market for companies with a clear property right structure.