The State Council, China's cabinet, formally cancelled a provisional regulation requiring listed companies to sell part of their State holdings through domestic initial public offerings (IPOs) and additional share offers, Xinhua reported Sunday, confirming a market rumour that drove share prices up on Friday.

The requirement still applies for Chinese firms to be listed overseas.

"The sale of State-held shares is an important reform move that is moving in the right direction,'' Xinhua quoted a joint spokesperson for both the Ministry of Finance and the market watchdog China Securities Regulatory Commission (CSRC) as saying.

But "it is hard to formulate an appropriate plan that is systematic and widely accepted by the market in a short time,'' the spokesperson said.

Major uptrend comes

The authorities launched the controversial reform in June last year to raise funds for an underfunded social security fund, by ordering listed firms to sell State shares equivalent to 10 per cent of proceeds from IPOs and new share offerings at market prices.

The move largely backfired, triggering months of market stagnation, drawing sharp investor criticism on overpricing and forcing the authorities to suspend it four months later for reconsiderations.

Worries over a new version of the scheme continued to overshadow China's stock markets, which lost some 30 per cent of total market capitalization in the past year. And investors generally remained wary in building positions despite government moves in recent months aimed at boosting confidence.

But the time for a major uptrend has come, analysts said, cheering at what they see as the government finally correcting its own mistakes.

"The market has bottomed out and should be able to start a turnaround on the news,'' said Zhou Ling, a manager at Haitong Securities.

Zhou said the authorities had been preparing the market over the past week for the move, citing remarks by CSRC Chairman Zhou Xiaochuan that stressed China's 11-year-old stock markets were still in an error-prone elementary phase.

Market rumours about the move, probably started by insiders, had already helped stock indices stage a robust rally by Friday's close, Zhou said.

"The news will substantially boost investor confidence, especially institutional investors,'' said Wang Yuanhong, a senior analyst with the State Information Centre. The government took a string of steps to boost market this year, including a cut in interest rates, reducing brokerage commissions charged to investors, a market-stabilizing reform in new share offer policies, as well as supportive remarks by senior officials, but the market continued to head down as investors were dogged by fears of a revised State share sale programme.

"Now they know that the sword hanging over their heads has been removed,'' Wang said.

Xinhua said the Ministry of Finance, instead, would inject part of State share holdings in listed companies into the social security fund, which will gain the cash it needs through dividends or selling the shares to strategic investors rather than in the domestic stock market.

This should give the State share sale programme a push in the direction by reducing State dominance in listed companies as well as in the entire economy, a goal many economists see as the true significance of the reform.

"They've made a step in the right direction,'' Wang said.

(People's Daily June 24, 2002)