It is rare for Chinese authorities to be so enthusiastic about the capital market.

One after another, a slew of market-enhancing news hit the headlines of business papers over the last few weeks.

On Monday, the central bank said qualified securities firms could float short-term bonds in the interbank market to raise funds starting from next month.

On the same day, Vice-Premier Huang Ju met with a group of overseas advisers to the securities watchdog and asked them to put their heads together to help upgrade the Chinese capital market.

The State Council also urged all relevant parties to implement previously discussed capital market reform plans and reiterated the significance of such reforms.

On Tuesday, banking and securities regulators sat together again to discuss procedures of letting banks to launch fund management companies.

The next day, another two foreign companies received licenses as qualified foreign institutional investors (QFII), bringing the number of QFIIs to 27, representing an even faster pace of opening up of the A share and bond markets.

On Thursday, securities firms were told that they can sell asset investment projects to the public if sufficient risk controls and appropriate fund management are guaranteed. And fund managers are also hopeful of managing private investment projects for specific clients, with regulations being drafted.

Still more new standards, rules and innovative products are expected to be introduced in the next few weeks, including a new initial public offering (IPO) pricing system, entry of more insurance and social security funds and the launch of more new fund products.

Government determination to repair the capital market with systematic reforms looks enchanting to investors, especially to those from overseas, who are attracted by the long-term Chinese economic prospects.

The Chinese economy has been driven by strong momentum the past few years and is widely predicted to stay on track.

"China is the greatest growth story of the world," said Burton G. Malkiel, professor of Economics and Finance at Princeton University.

A global portfolio therefore must have stock in a country like China, he said last week during a visit to Beijing.

Moreover, the Chinese Government is quite practical, he said.

It has realized that the continuing growth of the economy depends more on the growth of the capital markets and therefore has initiated many reforms.

However, as a developing market, right now China is still facing some significant problems, such as strong speculation, lack of large companies that are representative of the economy and the fact that only a minority ratio of shares are in the hands of the public, Malkiel said.

Many listed companies must still improve corporate governance and information disclosure.

It is the same problems that trouble many domestic investors, after all the ups and downs of the bourses over the past decade. Many investors are becoming more rational and cautious in investment choices, and no longer simply chase after the policy moves.

Instead, the indices do not always follow the policy climate as closely as before and sometimes even move in a different direction.

In spite of the warm policy climate, the Shanghai composite index again tested the 1,300-point psychological level last week, losing strength from a brief rebound in mid September as investors took to the sidelines.

Investor confidence is still fragile, said Wen Yuechun, chief economist of Tianyi Securities.

It will require great patience for investors to wait for the implementation of all the pledged reforms, he said.

Securities regulators have mapped out a five-year-plan for the development of China's capital market.

In five years, the market should complete the transition towards a market-oriented one and build up the basic mechanisms for fair and open competition, an official with the strategic planning committee of China Securities Regulatory Commission (CSRC) said last week.

By then, the overall ratio of direct financing in the economy should be increased substantially.

Then, listed companies will also have to shoulder obligations in operation and information disclosure. And the delisting, credit rating and risk warning mechanisms will be improved, the official said at a seminar in Beijing.

And investors' interests should be better protected with a sound compensation system that clarifies the civil liabilities of all market participants. Minority investors will have more of a chance of getting compensation for their losses from the liable parties.

Such a five-year-plan does look rosy. But in the near term, investors still have to be cautious.

"People are often asking the question that whether the A share market is worthy to invest in. As I see it, if the Chinese economy continues to be strong, the answer should be positive," said Mei Jianping, an associate professor at the Leonard N.Stern School of Business of New York University.

And as the economy grows, a number of internationally competitive companies will also emerge in China, he said.

Already, the A share market is integrating into the global markets, said Yang Rui, deputy director of the research department of Boshi Fund Management Co.

Since China joined the WTO at the end of 2001, it has started to implement its promise of opening up the domestic stock market.

In addition to the 27 QFIIs, who are authorized to trade A shares, bonds and other domestic investment products approved by the authorities, about a dozen joint venture fund management companies and two securities house ventures have emerged in China.

And more foreign institutions are still expected to enter the market either through acquiring investment licenses or launching ventures.

They have become a new force to affect and decide the pricing standards of A shares, said Xu Gang, general manager with the research department of CITIC Securities Co.

Reevaluating A share prices accordingly to international standards is an unavoidable trend as the A share market becomes more closely linked with global markets, he said.

But apart from prices, one significant part of the integration process is the investment ideology and the method of price assessment, a newly released report by Boshi Fund Management said.

A share companies have to create more value for the general shareholders to attract more investors, it said.

The solution of the split share structure is also a must to heighten market liquidity and transparency.

For the time-being, stock picks are very important. Firms with better credit and management as well as companies with more core competitiveness or growth potential are preferable choices, the Boshi report said.

Some A share companies in the utilities and infrastructure sectors, for example, have seen their prices moving to a very reasonable level after a steady market correction. And some are already close to the prices of H shares, said Yang Rui.

One way of avoiding losses in investing in an emerging market like China is to increase the diversification in the portfolio, said Malkiel.

Meanwhile, investors should learn to monitor the performance and status of the listed companies closely in the first place to ensure that the corporate assets are not misused and that their interest is protected.

Of course, it may be difficult to do so, since market transparency is limited and information is not always accessible.

But investors should keep pushing for more information and transparency and force change to occur, Malkiel said.

(China Daily October 25, 2004)