The Composite Index of the Shanghai Stock Exchange dived from 2,200 points a year earlier to 1,366 as of Monday, a drop of nearly 40 per cent.

The drastic slump has cast wide-spread gloomy pall over China's stock investors, who are now eagerly waiting for a stimulus from the government, as they did before.

Still, there is no clear message from the government at present whether the new detailed State share selling scheme will finally come into being soon.

The initial scheme, which required public firms to sell off State shares worth the equivalent of 10 per cent of the proceeds from their share issues, was introduced by the China Securities Regulatory Commission (CSRC) last June, causing a series of drops in the market.

In the following four months, the market shed about 30 per cent of its value as investors worried that the massive selling of State shares, which make up 70 per cent of all company shares, would soak up market liquidity.

Deeply concerned about the unexpected continuous sharp fall in the markets, the commission stepped in and suspended the scheme on October 22 last year, hoping to shore up investors' confidence in the market.

But when it announced the suspension, the CSRC also said that the State share-selling scheme would be continued in a new form but did not set a specific timetable, thus planting the seeds of uncertainty that are connected with the latest plummeting of the indices.

The hasty introduction and suspension of the scheme, though both well-intended, are indications of the CSRC's inconsistent governance of the market.

Beginning from 2001, CSRC has stepped up its supervision of market operation, vowing to take a tougher line to clean up and better regulate the market, which has been laden with fraud and speculation. So far, some positive results have been achieved, with some listed companies engaged in illegal activities being punished and poorly run companies delisted.

However, while cleaning up and standardizing the markets, the watchdog itself should improve its methods of governing, making its rules and regulations more consistent and considered.

The volatility and uncertainty, for example, that resulted from the CSRC's handling of the State share selling scheme, could only add ammunition to the already intense speculative atmosphere in the markets and make it hard for a sound market system to take hold.

When devising new rules and regulations, the CSRC should, rather than being swayed by the sentiments in the market, act in a considered and consistent way that both respects the market rules and takes seriously public suggestions in order to minimize the adverse impacts they might have on the market.

Careful deliberation should precede decisions. It is encouraging at present that the CSRC seems to have moved more cautiously this time: despite the market's nose-diving, it has not rushed to come up with a new "policy support scheme" to rescue the market as it frequently did before. Instead, it is allowing the market to adjust itself, a step in the right direction

(China Daily January 23, 2002)