The State Council recently listed complete stock merger reform as one of its key tasks this year. The country can no longer afford a split share structure.

Less than a year after the China Securities Regulatory Commission issued a guideline on share-merger reform last April, hundreds of listed companies, with an aggregate market value of more than half of the total capitalization of China's domestic stock markets, have carried out their plans to circulate non-tradable State shares.

With many other listed companies rolling up their sleeves to follow suit, it is fairly reasonable to expect that the reform will near completion by the end of this year. And the State Council's call for action will surely increase chances of success.

State share reform is of far-reaching significance to the sound development of China's stock market.

Due to a decade-old split share structure featuring numerous non-tradable State shares that account for about two thirds of all Chinese stocks, individual investors in the country have long suffered frequent abuse of power by majority shareholders, and the lingering threat of oversupply of cheap State shares some time in the future.

Many believe, or hope, that the current reform will put individual investors into a better position to hold majority shareholders and managers accountable.

As State shares are made tradable, the pressure of takeovers will force the later group to act in the interests of all shareholders, not just their own. By including a compensation package in each of their share-merger plans, majority shareholders have, at least nominally, made up part of the losses individual investors suffer.

Now, as the authorities are resolved to press ahead with the reform, which has quantitatively passed the midway point, it is time to take stock of the progress, considering not only its speed, but also its impact.

Given that reform has continued to pick up steam in spite of a few failed cases, it is almost a sure bet that the overwhelming majority of the country's 1,300-odd listed companies will jump on the bandwagon soon.

But whether some key blue chips adequately compensate their individual investors and whether some particularly poor performers are promptly dealt with remains unknown. Most of these two types of listed companies are yet to be tested by the share-merger reform. Their response will largely define the public support needed to advance the reform.

As to the impact of the reform, however, there is still a lot to worry about.

Liquidity concerns weigh heavily on public investors, even though majority shareholders all promised to float once-non-tradable stocks only after a span of a few years. Not to mention the future pressure on liquidity, any speculation of issuing new shares is enough to talk down the domestic stock market immediately.

The fact that China's banks are flooded with savings betrays a chronic lack of confidence among public investors in the domestic stock market.

It should be the utmost goal of all stock reforms to stimulate public participation and thus boost development of the stock market to realize efficient distribution of resources among the national economy.

In this sense, the share-merger reform is far from completion.

(China Daily March 27, 2006)