China's stocks plunged to a more than eight-year low yesterday, as fear of expected State share selling further eroded already weak investment sentiment in the bourses.

The benchmark Shanghai composite index fell 2.03 percent to close at 1,039.187 yesterday, in spite of a mild rebound on Monday and Tuesday. It was the lowest close since the index ended at 1,025.3 on February 27, 1997.

A major reason for the fall is the announcement by China's securities regulator to expand the State-holding-sale experiment to more domestic-listed companies, analysts said.

Moreover, buying sentiment remains weak and investors are likely to continue to take the sidelines unless fresh stimuli, like the entry of market stabilizing funds, are introduced, said Wang Xiaomin, a Shanghai-based analyst at Xiangcai Securities.

The China Securities Regulatory Commission (CSRC) announced on Tuesday it would soon promote the second batch of pilot companies that will join the experiment to sell and circulate a portion of their State and legal-person shares that are still not traded in the market.

Four small and medium-sized A-share companies, the first pilots for the experiment, revealed their plans for the nontradable-share-flotation a month ago, offering public investors some compensation to make up for their potential losses when the nontradable shares are floated.

But the plans are still to be approved by the general shareholders' meeting of the firms. The latest report by CITIC Securities said the compensation offered is not sufficient, which triggered the latest round of falls in the bourses.

A result of the planned economy, around two-thirds of all shares in domestic-listed firms are still not open for trade, hindering market liquidity, efficiency and transparency. But the authorities are now firm about solving the problem.

"Regulators seem to be determined to go ahead with the nontradable share sale, regardless of the near-term market movements, but they should pay attention to the capacity of the bourses and come up with parallel reforms to increase fund supply and repair investment confidence," said Wang.

CSRC has set no restriction on scale, industry and equity structure on the second batch of listed companies to undertake the State share sale, only saying they will have "broad representativeness."

But insiders said more large companies should be picked this time, based on a circular jointly issued by CSRC and the State-owned Assets Supervision and Administration Commission on Monday, which encourages large and medium-sized listed companies to take part in the experiment.

Their participation, the circular said, should give investors more stable expectations of the reform and should set positive examples for other listed firms.

Geng Liang, chairman of the Shanghai Stock Exchange, also said yesterday that the exchange hopes more high-quality listed companies, especially larger State-controlled companies, can join the pilot scheme to sell and circulate the nontradable shares.

The exchange plans to create a separate index for nontradable shares that are listed, he said at a forum held yesterday in Shanghai.

(China Daily June 2, 2005)