The most encouraging remark about China's stock market I have heard recently came from Guo Shuqing, chairman of the China Securities Regulatory Commission.

On various occasions the newly appointed top securities regulator spoke of possible reforms that include forcing the listed companies to raise dividends and speeding up the delisting procedure for trash firms.

Despite a bearish run that has lasted more than four years, he remains upbeat about the market. Actually, he thinks it is the best time to buy.

China's blue-chip stocks have been showing "exceptional" investment value, he said last week. He based this judgment on the price-earning ratio of the market, a main gauge of stock valuation, which stands lower than 13. That, in theory, means an annual investment return of about 8 percent, more than double the key interest rate of 3.5 percent for a one-year fixed bank deposit.

That may sound logical. But logic is what the market defies. Otherwise you cannot explain why the Dow Jones is just short of its pre-financial crisis record of 14,000, despite all the economic woes faced by the United States, while the benchmark Shanghai Composite Index is still struggling well below half its peak of more than 6,100 four years ago despite China's robust growth.

China's stock market has long lost its role as an indicator of the country's economic pulse. But its bad reputation does not stop there.

Ten years ago, top economist Wu Jinglian described it as worse than a casino, because "in a casino at least you cannot see other people's cards".

There has been improvement since then, but far from enough. Some of the listed companies have degenerated into "well-organized financial fraud syndicates", as professor Zhou Xiaozheng from Renmin University of China put it. Their only goal is to round up as much money as possible through either insider trading or price manipulation, at the cost of the interests of small investors.

There are a lot of companies that just tell stories and make up figures to fleece investors.

A friend of mine, a veteran investor who started trading in the early 1990s, was particularly enthusiastic about one high-tech firm which he believed had great growth prospects. Market potential seemed immense for its products.

But he soon stopped talking about it, and it wasn't hard to understand why. The producer of liquid-crystal displays has lost more than 10 billion yuan ($1.59 billion) since 2005 when it started a construction spree of assembly lines.

Such a company would in all likelihood have gone bankrupt in a mature market. Even according to China's stock market rules, it could have been delisted years ago after it had been in the red for three consecutive years. But each time it looked doomed, it has found the ways and means that have enabled it to stay on. It has managed to amass 28 billion yuan through refinancing or the issue of new shares in the past six years, but there is little hope that it will ever make any money, as the company's products consistently lag behind those made elsewhere.

Sadly, of the about 2,000 listed firms, the above company is not the worst. It at least makes something and tells the investors frankly that it is losing money.

For small traders, the only way to survive is to speculate, to "stir-fry" stocks by profiting from their short-term price fluctuations - this has become a golden rule over the past two decades.

Our top securities regulator, who took the helm of the world's third largest stock market late last year, faces some tremendous challenges. For investors to take his investment advice seriously, he should start by picking up a scalpel and removing the tumors in the market.

He has talked the talk, now it is time he walked the walk.

The author is a writer with China Daily. E-mail: huangxiangyang@chinadaily.com.cn

(China Daily 03/08/2012 page9)