The government on June 23 announced that it was giving up its plan to sell off massive State holdings in listed companies through the domestic stock market, removing the barrier that has been hindering a market turnaround for the past year.

　　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, confirming a market rumor that drove share prices up on June 21.

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

　　Market rumors about the move, probably started by some insiders, had already helped stock indices stage a robust rally. Nobody can doubt that the sudden cancellation of the controversial State share sell-off plan can easily rocket the depressive stock marketsintosa new "decca"for shareholders. 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.

　　Shares on the Shanghai stock market shot up Monday as investors reacted with glee to news the government is to abandon a planned massive sell-off of its shares in domestically-listed companies.

　　Shares on the local currency-denominated Shanghai A-share index ended the morning session up 125.71 points or 7.7 percent, at 1,756.74 amid a trading spree which saw turnover hit 33.4 billion yuan (US billion), while Shenzhen's climbed 9.34% to 3,478.39.

　　The market has bottomed out and should be able to start a turnaround on the news, said Zhou Ling, a manager at Haitong Securities. Naturally, listed companies could not be happier as the revitalized market again bumps needed fundssintostheir vessels. Meanwhile, for numerous Chinese shareholders, they can give a long sigh of relief.

　　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.

　　Since the authorities launched the controversial reform in last June, 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. The regulation still holds effect on Chinese firms to be listed overseas.

　　But the time for a major uptrend has come, analysts said, cheering at what they see as the government finally made some corrections. By finally giving up such an unpopular scheme, the government proves itself keen and responsive to reality.

　　The news will substantially boost investor confidence, especially institutional investors, said Wang Yuanhong, a senior analyst with the State Information Center. 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 in the past continued to head down as investors were dogged by fears of a revised State share sale program. Now they know that the "word"hanging over their heads has been removed.

　　Xinhua said the Ministry of Finance, instead, would inject part of State share holdings in listed companiessintosthe 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.

　　Though the cancellation, as expedience, can effectively rebuild market confidence for a fairly long period, the problematic stock structure of most listed companies will continue to undermine this market's fundamental role of optimizing resources distribution.

　　We certainly will not expect a cure-all, as the failed sell-off plan suggested how formidable the task is.

　　But just as a clear understanding of the difficulty and dimension of the task is a prerequisite for its accomplishment, decision-makers must press ahead with efficiency-oriented reforms of the stock market.This should give the State share sale program a push in the direction by reducing State dominance in listed companies as well as in the entire economy, a goal which many economists see as the true significance of the reform.

　　Background

　　◆On June 13, 2001, the State Council unveiled rules that aimed at reducing State holdings in companies insgroupsto finance social security funds.

　　◆The long-expected regulation covers the transferring or selling of State shares in listed firms. It said companies making an IPO (initial public offering) or issuing

　　◆additional share, should at the same time sell the equivalent of their State holdings to 10 per cent of the offering value to public investors. The money raised will be putsintosthe social security funds. The rules also apply to firms seeking an overseas listing.

　　◆Pricing of the shares sold will be based on demand in the market. In addition, a handful of listed companies will also be selected to place or buy back State shares on an experimental basis, depending on the funding needs of social security funds and the condition of the market. Listed companies which transfer State shares should also contribute a certain ratio of income to the social security funds, but the exact ratio is still to be decided. The Ministry of Finance will design rules for the management of social security funds later. And the China Securities Regulatory Commission (CSRC) will also come up with regulations on information disclosure in the selling of State shares by listed firms.

　　◆Minister of Finance Xiang Huaicheng said then the reform was not only a timely cure for the fund-thirsty social security sector, but also very positive news for the stock market. While helping relieve the fund-shortage pressure for the social security sector, it should also push the listed companies to lower the ratio of State holdings and diversify their shareholding structure. More participation of private shareholders would enhance public supervision in the management and operations of listed companies, said Xiang.

　　◆The CSRC Chairman Zhou Xiaochuan said it would help listed companies improve corporate governance and upgrade quality. Moreover, the government would invite professional fund managers to operate the social security funds and some of the funds would be reinvested in the stock market to ensure a benign recycling of capital.

　　◆At that term, shares owned by the State and corporations account for about two-thirds of the total stocks in domestically listed companies and were still non-tradable as the result of the lingering influence of the planned economy. They totaled 252.7 billion shares by the end of March, according to a report by the Finance and Securities Institute (FSI) of the People's University of China. The reform to cut State holdings is closely connected to the entire economic restructuring in China. It will also promote positive changes in the social security fund management and investment scheme,"Said Wu Xiaoqiu, director of FSI. The market response was not good. The Shanghai index dropped surprisingly. An unnamed analyst estimated reducing the state share was bad news for the market. "If the government reduces 1% of state shares, it will then arbitrage 36 billion yuan (US.35 billion)."He doubted the market had the capability to absorb the tremendous state shares. The following practice proved his doubt.