China's securities sector has seen considerable volatility but has undergone significant development overall, and the country's legal and regulatory systems needs to be more transparent and market-oriented, a report by the International Monetary Fund (IMF) said on Tuesday.

A number of important reforms support the movement toward a more modern capital market in China at the regulatory level, the IMF said in the Financial Sector Assessment Program, a comprehensive and in-depth analysis of the country's financial sector.

The key reforms include the introduction of a market-based pricing system for non-tradable shares in listed companies held by government and semi-government authorities, the launch of stock index futures trading, and the introduction of extensive third-party custodial requirements for handling client property and risk-adjusted capital requirements for securities firms.

"These reforms have enhanced the transparency of the market, broadened the range of available products and improved the financial soundness of intermediaries, to the considerable benefit of investor protection in China," the IMF said in the report.

The reforms also appear to have provided greater stability to securities firms and in protecting client assets, it added.

Meanwhile, the report noted that while the China Securities Regulatory Commission (CSRC) has taken an active and strategic approach to regulate securities markets, the legal and regulatory systems need improvement.

The report acknowledged that the CSRC has adopted a clear set of accounting and auditing standards, which are well advanced toward converging with the International Financial Reporting Standards and the International Accounting Standards and which are of high and internationally acceptable quality.

Regarding the country's secondary market, the report suggested that the regulator should consider extra and continuing efforts to detect and deter unfair trading practices, because the number of abnormal trades detected and on which action is taken seems low given the size of the market, its rapid growth, and the enormous interest generated by new listings.

"The report highly recognizes the development and achievements of China's capital market over the past two decades, as well as the regulatory efforts," said the CSRC in response to the report.

The securities regulator in recent years has adopted a series of market-driven measures including reform of initial public offerings.

It has stepped up efforts to inhibit insider trading and market manipulation. Recently it also asked listed companies to provide higher payouts to shareholders.

Analysts said that the Chinese securities sector is still faced with a number of challenges, which include the improvement of the market's legal framework, better protection of investor interests, and better regulation of wealth-management products.