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The Shanghai Stock Exchange Composite Index, the benchmark index for China's share market, hit an all-time high yesterday.

It seems that the volatile market, which was in a bearish mood for most of the past four years and seldom performed its supposed role as an economic barometer, has finally caught up with the rapidly growing economy.

This latest share price surge represents investors' endorsement of recent attempts by the regulators to revitalize the market.

Regulators last year began to remove the overhang of the US$250 billion worth of non-tradable shares held by the State. The existence of non-tradable shares made it very easy for their holders often dominant State firms to control listed firms and infringe upon the rights of smaller investors.

The reform, which is coming to an end, addressed this underlying defect of the stock market.

Along with the reform of the share structure of public companies, big firms such as the Industrial and Commercial Bank of China were listed on the domestic market, which greatly enhanced the stock market's significance.

In addition, new trading instruments such as a futures index are expected to be introduced soon, indicating that regulators are poised to accelerate their pace in building a more sophisticated market.

All these measures have considerably improved market sentiment and attracted funds from both domestic and overseas investors.

China's smaller investors have very few instruments to invest their money in. But the problems in the stock market kept many investors away.

Foreign investors, which are now allowed to buy yuan-denominated shares through the qualified foreign institutional investor system, have also been eager to share the benefits of the thriving Chinese economy.

The recent positive developments have boosted the confidence of both Chinese and foreign investors.

However, the prospects for further growth should not be exaggerated.

Although some of the market's key problems are being resolved, the chronic problem of the poor quality of listed companies is still there.

Without companies that perform well and can produce handsome dividends, the rise of market indices cannot be sustained.

Regulators still have a long way to go to make the market a fair, effective venue for capital allocation.

Solving the share structure problem has rectified a major irregularity in the market, but loopholes still exist, which offenders can use to manipulate the market and to encroach on the interests of small investors.

(China Daily December 15, 2006)