China's shares opened 8.81 points higher than the previous close and jumped as much as 2.5 percent in early trade Monday, stimulated by reports that regulators had worked out a slew of fresh market-boosting measures.

But the rally did not keep its momentum, with Shanghai composite index ending at 1011.50 points, 0.64 percent down.

The China Securities Regulatory Commission (CSRC), the market watchdog, has planned a series of steps to enhance the stock market and to ensure the success of on-going reforms to sell State shares. The State Council has approved these plans.

As part of the slew of moves, the regulator will encourage more capital to be invested in the stock market.

The CSRC will raise the quota for qualified foreign institutional investors (QFII) to US$10 billion from a previous US$4 billion.

CSRC Chairman Shang Fulin indicated in June that the investment quota for QFIIs would be increased, but did not provide a figure at the time.

In addition, State-owned enterprises (SOEs) will be given free rein to invest in the stock market. Insurance capital and social security funds will also be encouraged to enter into the stock market.

Meanwhile, market volume will be strictly controlled to ease concerns over the possibility of flooding the market with shares when large amounts are floated in the reform of SOEs.

Initial public offerings will be suspended indefinitely while the share flotation reforms are being carried out.

As part of the country's planned economy, the State maintained control of two-thirds shares held by State or legal bodies. These are not tradable. Tradable shareholders have to shoulder all market risks and price fluctuations.

But the regulator will not allow listed companies to launch new fund-raising initiatives if they have not sold their state shares.

The regulator will also enhance the market in other ways.

Troubled listed firms will be restructured to improve their performance. The pilot stock brokers selected to enjoy policy support for development will also be offered cash to solve their capital flow difficulties, according to the CSRC announcement.

The regulator is trying to keep a stable market environment to ensure the success of the share restructure reforms, said Dong Chen, a senior analyst at China Securities.

The flotation reforms are currently at a crucial point and a stable market is a must if they are to go through smoothly, he said.

But he pointed out that the sooner these steps are taken the better. Otherwise, the government will have to spend more effort and money to rescue the stock market, the analyst said.

The analyst also said the QFII quota increase would give more foreign strategic investors access to the domestic market.

Many foreign investors are very interested in China's securities market, he said.

Regulators have granted 27 overseas firms, including Deutsche Bank AG and HSBC Holding Plc, approval to trade A shares in more than 1,300 firms, as well as treasuries and corporate bonds, under the QFII scheme.

However, what the market lacks most is confidence, said Li Yongsen, a professor at the Financial and Securities Institute of Renmin University of China.

The key point about boosting market confidence is to protect small investors, he said.

Right now compensation given to tradable shareholders from non-tradable shareholders in pilot firms taking part in the reform process is not enough, he said.

If the system does not protect investors' interests, no individuals or institutions will take risks even though the regulators want encourage more capital into the market.

In the non-tradable shares reform experiment, four companies were selected for the first round in May, and 42 more were chosen for the second phase last month.

There will be no third round, and the CSRC is analysing the two rounds that have already taken place before pushing forward with more reforms.

(China Daily July 12, 2005)