"Sharp price drops always followed new share issues, which has almost become the rule over the past year," says Mao Nan, an analyst at Orient Securities in Shanghai.

Some stock analysts say the government should take further measures to rescue the market and restore its basic function, especially when the average P/E ratio (price-earnings ratio) has dropped to a level considered unattractive for corporations to sell new shares. The average P/E of A shares listed on the Shanghai bourse has dropped to around 20 from the high of 69 in October 2007.

Economists and experts suggest the securities regulator more strictly monitor the amount and frequency of new share issues and tradable share conversions. Statistics show 7 billion non-tradable shares from 98 listed companies could have been converted into tradable ones in June, amounting to 98 billion yuan, down 65 percent from the conversion in May.

Analysts also suggest the government could try speeding up the opening up of the A-share market to foreign institutions by increasing the quotas of overseas capital in the market under the QFII (Qualified Foreign Institutional Investor) scheme.

The total quotas available were raised to $30 billion in December from $10 billion, but as of April, the China Securities Regulatory Commission had approved a total of only $10.57 billion in quotas for 54 QFII institutions. In May, it issued quotas to two more companies, for which the amounts were not disclosed.

(China Daily July 14, 2008)