The Shanghai and Shenzhen markets have already sunk nearly 10 percent since the start of this year and the slide picked up speed yesterday.

The Shanghai Composite Index, the benchmark indicator which tracks both yuan-denominated A and hard-currency B shares, fell 3.29 percent yesterday to a two-year low of 1485.11, while the Shenzhen Sub-composite Index finished 4.29 percent lower at 2934.38.

The slide has gotten so bad that the Shanghai Composite Index yesterday dropped below 1514 points, a psychologically important mark that was perceived as an absolute bottom level for the bourse, due to regulatory support.

That level was last seen at the end of October after the government suspended a policy of state equity sales that wiped out more than 30 percent of the market value within just three months.

Investors are now worried that state shares will go on the block again as soon as next month. Even worse for traders is widespread speculation that new regulations concerning the sale of state shares will not be as investor-friendly as expected.

Some local finance Websites are quoting Hong Kong newspapers as saying that the state shares will be sold at a premium rather than a discount, and some big-cap stocks, such as China Petroleum & Chemical Corp. and Shanghai Automotive Co., will be chosen as pilot companies.

While the China Securities Regulatory Commission has tried to quash the speculation, saying the government is still working on the rules, industrial insiders told Shanghai Daily that the framework regulation has already been written and will be unveiled next month.

Companies yet to gain a listing will be allowed to trade all shares on the stock market after initial public offerings. The 1,000-plus public firms already listed on the Shanghai and Shenzhen bourses would see their non-tradable stakes sold to investors in batches.

Currently, those companies on average only trade one-third of their shares on the market, with the rest held by the government or large investors.

"Now you should know why the market has dropped so much recently," said one local analyst, suggesting that knowledge-able big players have off-loaded their stocks in anticipation of the regulation.

The rule appears radical to many market observers, who believe the massive number of state shares hitting the market at one time will send the boards crashing.

"If so, it will be a heavy blow to the market and investors will re-evaluate the market and peg it at a much lower level," said analyst Dai Ming of Citic Securities Co.

China's stock market now trades at a much higher price-to-earnings ratio than the rest of the world, because nearly two-thirds of shares in domestically listed companies are not tradable on the stock market, seriously distorting the relation between the demand and supply and enabling companies to sell their initial shares at a very high prices.

(eastday.com January 15, 2002)