The second draft of the law is expected to be forwarded to China's top legislature in March for approval.

The 10th National People's Congress convenes its first session in March.

The proposed revisions are presently being examined by securities firms. The companies will provide feedback.

Sources suggest many well-planned clauses will be restructured to pave the way for follow-up reforms, and to ease the ill-fated practices in the stock markets.

Detailed revisions will involve a wide range of areas - including trading models, financing of securities houses, market supervision, funds inflow to the markets, a crackdown against ill-fated practices and strengthened follow-up civil compensation.

"Apart from direct measures to jump-start the market, we believe the revisions will at least clean up market barriers to prepare for additional reforms when regulators plan to introduce other measures and streamline the market," the source said.

Legislation that bars the long-term, smooth growth of the stock market should be revised, the source said.

The new law will encourage product innovation by providing securities houses, currently under tough controls, with greater flexibility, the source said.

The revisions will allow the resumption of the "T+0" trading model, which was abandoned in 1995 in an effort to stave off market speculation.

China's A-share market is currently dominated by the "T+1" trading model. That means investors cannot sell the shares on the same day they purchased them. The model was designed to prevent hefty market speculation.

However, the market remained highly speculative, due to lack of transparency and manipulation by large companies.

"The overdue reform should be put into practice as soon as possible to increase market liquidity, which is important for a healthy stock market," said Wu Shukun, a senior analyst with Haitong Securities.

A less speculative market could be achieved by current ceiling fluctuation limits, which fetter a single share fluctuation, up or down, by 10 per cent, Wu added.

"Prices, whether the market is speculative or not, will be decided by the quality of the listed firms and enhanced transparency of information," Wu told Business Weekly.

Guo Feng, executive director of the Institute of Financial Laws under Renmin University of China, agrees.

The revisions could offer incentives that revive trading volumes, and thus increase market confidence and liquidity, Guo said.

"The banking market and securities market are closely connected, and should not be segmented. Bank funds can lead to returns ... rather than creating bubbles in the stock market," Guo said.

Sources suggest other changes will include widening investment and financing channels for securities houses.

That, sources say, would eliminate ill-fated practices from the securities sector, and lead to tough restrictions on the expansions of China's fragile stock firms.

Financial security remains one of the central government's top concerns, and is considered key to China's long-term economic prosperity and social stability.

Many tough measures were implemented in the late 1990s to protect China's financial institutions from the Asian financial crisis.

China's stock market fell into deep doldrums in the middle of last year. The slump was triggered by many market scandals involving listed firms and the planned massive sell-off of non-tradable State-held shares in 1,200 listed companies, which sparked fears among investors the value of their shares would tumble.

Those non-tradable shares, a major issue facing central regulators for years, account for two-thirds of listed State-owned firms' assets.

Regulators suspended the policy earlier this year, but the market did not regain momentum.

The amendments are also being billed as a way for the central government to unbundle the ill-fated stock houses, which could lose money this year due to their sluggish performances.

Unbundling their businesses is expected to eliminate various systemic risks in the market, which could cause the collapse of stock houses if the market remains soft for a prolonged period.

The amended law could allow players to make financial innovations, by introducing new products into the market, as stock houses will likely be allowed to deal with new businesses such as asset management.

"Stock firms should also be given room to develop futures products that prevail in western markets, but are prohibited under China's current legal framework," said a senior researcher with CITIC Securities.

(Business Weekly December 24, 2002)