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The stark difference between the distressing performance of China's stock market and the country's robust economic growth does not deny the intrinsic role of the former as a barometer of the latter.
Instead, it only reveals a serious lack of regulations that are necessary for the stock market to assume its fundamental role.
The securities authorities' recent decision to suspend initial public offerings until it formulates new rules to price new shares, can be seen as a much needed effort to overhaul the problematic regulatory regime.
But before decision-makers take the plunge, clear thinking about the function of the domestic stock market is a matter of urgency.
In spite of the nearly doubt-digit growth of the Chinese economy so far this year, domestic stock markets have slipped to a nine-month low in recent weeks.
Undoubtedly, the credit screw the government availed itself of to cool down some overheated sectors was an ostensible culprit behind the falling stock prices.
Yet, the fact that the country's industrial profits increased by 39.7 per cent year-on-year in the first seven months this year shows that the ongoing macroeconomic control was not the real cause of a bearish stock market.
The performance of listed companies in the domestic stock markets actually tallies well with the country's economic performance. Their newly-released half-year reports indicated that profit of each share they issued soared by 36.7 per cent in the first half of this year. But in the meantime, the price of their stocks fell on average by more than 20 per cent.
The contrary direction listed companies' profits and stock prices go has constituted an ironic footnote to the stock market's role of "barometer" of the national economy.
In a market economy, the stock market should be a marketplace where investors can do votes of confidence according to publicly disclosed information of listed companies. Since corporate profits are closely related to the interests of shareholders, stock prices can thus be positively linked to the economic performance of listed companies and the national economy at large.
The current situation in the domestic stock market, nevertheless, describes a totally different logic. Stock prices are virtually divorced from the performance of listed companies.
There are at least two major reasons for this.
On the one hand, the existing regulations cannot effectively protect the interests of shareholders by assuring their rights to share listed companies' profits.
On the other hand, stocks have been improperly priced from the very beginning regardless of each companies' real performance and potential.
Now, the securities authorities are setting to address one of these problems. This is good, but it is not enough. To make the stock market work, the policy-makers must pursue a far broader solution to present problems.
(China Daily September 2, 2004)
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