In his report on the Outline of the 10th Five-Year Plan (2001-05) last week, Premier Zhu Rongji called on the nation to "standardize and improve the securities market, and safeguard the interests of investors."

For many in the securities industry, Zhu's words delivered a positive message.

"The premier mentioned the securities market several times in his report, and I think the government expects the securities industry will play a bigger role in the future," said Lei Ting, a senior analyst with the China Communication Securities Co Ltd (CCS).

As many predicted, the government hopes the securities market will help impose a corporate system on State-owned enterprises, expand their scale and sharpen the competitiveness of the State sectors.

Following Premier Zhu's report, Li Rongrong, minister of the State Economic and Trade Commission, told an NPC press conference on Saturday that large and medium-sized State enterprises will be encouraged to go public during the new plan period.

He said he hopes 30 to 50 internationally competitive conglomerates, with self-owned intellectual property rights, will emerge through restructuring and mergers.

Numerous small businesses are thirsty for funds and research institutions hope to transform their innovations into industrial products. There is support for a second-board on the market to attract venture capital for small enterprises and help develop high-tech sectors.

Moreover, the government has decided to increase ways to utilize foreign capital, including expanding investment funds and securities.

The government has shown its determination to integrate China into the global capital market. These plans were covered in Premier Zhu's report.

Experts say there is a long way to go before the market is mature. The capital structure of State-controlled public companies is still a major concern.

Shawn Xu, managing director of the Research Department under the China International Capital Corporation Ltd (CICC), said the government faces an uphill battle to re-organize the capital structure of State-controlled public companies due to the high percentage of State-owned shares.

Currently, more than 70 percent of shares in the 4.8 trillion yuan (US$579.7 billion) securities market are State-owned and not tradable. The volume of funds these enterprises can raise is limited.

Therefore the government's efforts to stimulate State enterprises by exposing them to market forces is difficult.

Though the government has planned to sell some of its stocks, many worry an influx of shares will depress the market.

Prices of SOEs have surged since their initial public offerings (IPO).

"I think great prudence is needed to address the issue, and it will take time to diversify the share ownership of State enterprises," said Xu.

"Meanwhile, supervision should be strengthened if the market is going to improve in line with international standards."

Irregularities in the market are always a big headache for China's securities watchdog.

Startling stories of collusion and insider trading on the market have been disclosed in recent months, leading to heated debates on whether the market needs an across-the-board shake-up.

Yet CCS's Lei Ting said it was unlikely the government would resort to drastic measures in solving problems.

"A radical overhaul will be good for nobody," he said. "It will be a blow to the industry and investors will suffer heavy losses."

Even State-owned banks would be harmed as large amounts of their money have entered the market via various channels, he added.

"As I see it, the government is going to tackle problems by developing the market further - it is a wise approach," Lei said.

Many problems in the securities market have not arisen by accident. They mirror deficiencies in the overall economic climate, he explained.

"When irregularities cannot be detected in time and no punishment is applicable according to the current law, how can you expect irregularities to be eliminated?" he said.

But signs show the government is trying to cultivate a better legal and financial environment to improve the market.

Premier Zhu called for improved laws and regulations concerning the markets.

He called for reorganizing and standardizing of the financial system, strengthening financial discipline, tightening audit supervision and standardizing the operation of intermediary agencies.

"Investors would prefer the government build a sound market where all players can be treated equally, rather than dwell on individual illegal cases," Lei said.

"The government is moving in the right direction," he added.

Shortly before this year's NPC session started, the China Securities Regulatory Commission released detailed rules to dump non-performing firms from the market.

The B-share market was opened to domestic investors last month.

Further steps are expected to enhance the securities industry. The process by which enterprises are listed is undergoing substantial reform.

Although there is no timetable, the government has promised to replace the current administrative approval system with a looser registration system.

But the real point is that the government is deregulating things that should be subject to the market, he added.

(China Daily 03/15/2001)