Only a sound legal framework can accommodate innovation and regulation together.

Changes to the planned economic system a decade ago put many things in the bourses under strict government control.

Government rulings used to reign supreme for all trades and listings in the marketplace.

But the situation has to be changed as sweeping market reforms have redefined the role and operation of the market participants and regulators.

Problems have to be dealt with head-on instead of being evaded.

"There is still much room to improve as the market is far from mature," said Larry H.P. Lang, professor of finance with the Chinese University of Hong Kong.

Loopholes in regulations and legislation provide fertile ground for price rigging and insider trading in China's stock markets, he said.

"That is not a real free market," Lang said.

Results of a recent inspection tour by legislators over the implementation of Securities Law indicated that the biggest problems lie with listed companies.

Some of them have disclosed false information during their pre-listing process and even after listing.

Some do not pay dividends regularly and some work together with investment institutions to manipulate stock prices.

There have also been cases of major shareholders eroding the interests of minor shareholders.

In many cases, offenders are just taking advantage of legal loopholes, said economist Wu Jinglian.

It deserves close attention from both regulators and the government, he said.will would take a longer period of time, regulators should come up with more flexible measures to fix problems.

A sound market will also heighten confidence for foreign investors, said Anthony Neoh, top adviser to the China Securities Regulatory Commission (CSRC).

The watchdog has been trying to consolidate the legal framework to restore faith in the market.

Many new regulations have been issued over the past six months.

The CSRC has been rewriting rules on the share issuing system and information disclosure standards as well as digging out an exit channel for disqualified listed firms.

These rules not only provide a timely supplement to the two-year-old Securities Law, but also set up new standards for the bourses, which are expanding rapidly with the boom in the economy over the past few years.

"In the past, we tried things out first and then designed rules. Now we should learn to set standards first for each new product," said CSRC Chairman Zhou Xiaochuan.

Zhou has brought into the market a flood of fresh reform plans since he took up the post in January last year.

By making the protection of investors' interest the top priority, Zhou also led CSRC to conduct a series of clampdowns on irregularities.

He also promoted the rewriting of codes governing market participants including listed companies, fund managers, brokerages and individual investors.

"The reforms give a positive signal to investors that the government is trying to make the market more transparent and efficient," said Neoh.

"China's stock market will undergo even more rapid development in the next 10 years. Standard operation is a must to avoid irregularities and clear the way for further reform," said Neoh.

Foreign investors, who will enjoy wider access to the Chinese capital market after China's World Trade Organization (WTO) entry, will also have to abide by the rules.

"It is a sort of mutual boost, which ensures more fair play," said Neoh.

Covering up the flaws will not help solve problems, he said. This has made the authorities more prepared to expose corruption and fraud.

Zhou predicted the government would gradually reduce its interference in the market and become a judge instead of a player.

Even good judges need good laws to ensure justice, one analyst said.

"China still lacks a burden of proof system in the securities sector, which requires the accused to put forward proof to be cleared of charges of irregularities like price manipulation," said Lang.

Lack of a civil compensation system also makes it difficult for investors to file and win lawsuits against companies or price riggers that damage their interests.

Even CSRC often encounters hurdles in investigations because of its limited power.

Parties proven to have engaged in irregular conduct often do not receive the punishment they deserve.

The full power of the law has not been exercised, said Lang.

Law-breakers should be charged responsible to deter others from considering illegal activity in China's fledgling markets.

(Business Weekly 07/10/2001)