"The securities regulator should make it a priority to revive the market's basic function as a source of finance for companies," says Zhang Xiaojun, an analyst at CITIC China Securities. "The government has demonstrated in the past that it has the will to intervene when needed."

On April 20, the government announced stricter restrictions over the conversion of non-tradable shares to tradable ones to ease investor concerns about a possible influx of new scripts dragging down share prices. Three days later, the stamp duty for stock trading was cut to 0.1 percent from 0.3 percent. The government also asked some fund management companies to cooperate by refraining from dumping their holdings.

These moves had sharp but short-lived impacts on the market as investors continued to be troubled by escalating oil prices, a depreciating US dollar and the specter of a global economic slump. Investor confidence has also been low as a result of the government's credit tightening policy to fight inflation.

The sluggish stock market plus the continuous credit tightening have forced companies to search for new ways, such as issuing corporate bonds, to find funds to fuel growth. However, bond trading with inadequate liquidity as well as the insufficient development of the rating system has impeded companies funding from this market.

Funding woes

With a number of big-caps dropping below their IPO (initial public offering) prices, many companies are concerned about the waning function of the capital market as a source of funding. Starting from China Pacific Insurance Co in late March, several big-caps including PetroChina, China Coal Energy, China Shipping Container Lines Co, China Railway Construction Co, China Construction Bank and other blue chips plunged below their IPO prices in the first six months of 2008.

What's more, share prices of some listed companies have fallen from 30 to as much as 200 percent shortly after making new issues. Latest figures show there are 114 companies whose current share prices have dropped below the issue price of their new shares.