The next two years will be a crucial period for China's next-stage stock market reform, and policy-makers should now focus on some key issues in a bid to boost the market's healthy growth.

First, the thorny issue of reducing non-tradable State shares in listed companies must be addressed.

The principles regarding the sale of non-tradable State shares should first be established before any implementation plans are mapped out.

Rather than being aimed at grabbing exorbitant profits from public investors, the sale should contribute to the solution of the lingering problem of predominant State shares in listed companies as well as improvement in the corporate governance of listed companies.

A principle of "not competing with public investors for profit" should be established; that is, the price of the sale of those non-tradable State shares should not exceed their net asset value.

Given the fact that holders of non-tradable shares are not just the central government, revenue from the sale should be properly distributed between the central and local governments and between the government and enterprises. The principle that "whoever hold the shares should get the revenue from the sale of that part of shares" should be respected.

By June 2003 there were more than 900 state-controlled listed companies. They are quite different in terms of share structure and it is unrealistic to apply a unified implementation plan to them. Therefore, efforts should be concentrated on drafting principles aimed at reducing non-tradable State shares.

After a consensus on those principles is reached, companies should be allowed to draft their own implementation plans in line with their concrete conditions.

As the stock market grows, it is inevitable more State enterprises will be listed. If the principles of state shares reduction cannot be established, as more state companies enter the market, the accumulation of non-tradable state shares will make it even more difficult to trade them.

It is therefore urgent for policy-makers to issue the relevant principles.

If the aforementioned principles are adhered to in the sale of State shares, the interests of investors would be ensured, thus boosting both activity and confidence in the market.

However, if policy-makers insist on a market price for those shares, the reduction plan would not be carried out smoothly. The drastic market fluctuation since July 2001, in the wake of the authorities issuing an interim regulation stipulating non-tradable State shares would be traded at market price, has proved that fact.

Second, establishment of a second or "start-up" board market, to serve small and medium-sized enterprises, should be expedited.

Since 2000, most relevant preparations for this have been completed. The main question now is the issuing of a management method for such a market.

The method should include the following points: The entry qualifications should be lower than those for the renminbi-denominated A-share market; all shares in the second board market should be fully tradable; a registry system regarding the stock issuance should be adopted and responsibility of underwriters and other intermediate agencies should be strengthened; the second board market should be independent of the main board market; a feasible delisting mechanism should be put in place.

Some people have misconceptions about the second board market. Impressed by the prolonged fall of the NASDAQ market in recent years, they hold that a second board market cannot succeed in China.

The success of a market, however, lies not in whether it can rise continually, but in whether it can provide crucial support for the growth of small and medium-sized enterprises. If pessimists cite NASDAQ as an example of an ineffectual second board market, they're overlooking the success story of the second board market in the Republic of Korea, which has outperformed the main board since 2000.

Another misunderstanding about the second board market is that the time is not ripe for its launch in China.

Regarding the systematic conditions, including economic development level and legal environment, the launch of a second board market in China now will benefit from a better environment than the start of the A-share market in 1990 and overseas over-the-counter markets in developed economies in the 1970s.

High technology has become a key factor in international competition. We should not wait any longer for the launch of the second board market, which will boost the development of domestic high-tech firms and contribute to the long-term sustainability of China's economy.

Some people fear that growth and high-tech enterprises may incur uncertainties in the market. In China, however, risks have been accumulating in the A-share market, which is fettered by the legacies of the planned economy. If the second board market can operate in line with market rules, it will not incur more risks than the A-share market - at least over the short term.

In the process of establishing such a market, market rules and international practice must be respected to ensure its health.

To speed up its establishment, we should not be slowed down by quibbling over trivial issues, such as the name of the market. It does not matter whether it is called start-up board, high-tech board, or growth enterprise board.

The pace of launching the second board also should not be slowed down by the unjustifiable fear that it will drive down the price of A shares.

The fact is that even without the second board market, the prices of A shares have been dropping since 1993. The launch of a second board market will inevitably lead to decline in A share prices at the initial stage. But it will create many investment opportunities for investors. So the interests of investors as a whole will not suffer much loss.

Other issues that need to be dealt with in the next two years include reform of the stock issuing mechanism and improvement in corporate governance of listed companies.

The current "channel" system, a semi-quota arrangement in which the China Securities Regulatory Commission gives quotas to the brokerages for them to recommend companies to be listed, still has features of the planned economy.

It should be reformed so that companies with a competitive edge can recommend more companies for listing, grabbing more market share, while weak companies will be culled through competition.

This will ease the transition of the stock issuance mechanism to the registry system.

(China Daily March 4, 2004)