Improving stock market

China's stock market rocketed on Monday on the news that the country will allow more foreign investment in the fragile market.

The benchmark Shanghai Composite Index rose 3.1 percent while the Shenzhen index soared even higher, both on the back of a 15 percent rise in the past month.

The morale-boosting news came from China Securities Regulatory Commission head Guo Shuqing, who said he hoped that the domestic stock market shares held by foreign investors would increase exponentially in the future.

The message indicates that China is making efforts to build a more open capital market, through which global investors can share the fruits of China's development success while domestic enterprises can make use of capital from overseas.

Regulators have been increasing the quota that foreign institutions are allowed to invest in the country's stock markets in recent years. By the end of last year, the total quotas allowed for QFII and RQFII programs, which allow overseas institutional investors to invest in the domestic stock market, have been close to 300 billion yuan ($47.8 billion). Guo said the scale should be expanded by at least nine or ten times, which means an explosive increase in capital influx.

While inflows of capital would provide ammunition for the weak market, which has fallen by about 60 percent from its 2007 peak, policymakers must be aware that improving the market should be the priority if they want to keep the market prosperous in the long term.

While providing liquidity for the market, foreign capital brings the risk of sudden withdrawal, which can cause shocks and slumps in the market index.

Moreover, given the country's high savings rate, what the Chinese market really needs is not capital, but systematic improvement so that honest enterprises can pool money for corporate development while investors share the fruits of their growth.

The current problematic market does not serve as such a platform for either enterprises or investors.

Guo admitted on Monday that market order needs to be regulated and the market is fraught with the disclosure of false information, cooked books, insider deals and manipulation.

Without substantial improvement the market risks becoming a place for speculation, and the index surge on the back of increased participation of overseas investors will not last long.