A review of China's capital markets this year makes me quite pessimistic. Without fundamental changes in the listed companies on the A-share market, securities houses, and the China Securities Regulatory Commission (CBRC), the markets will remain what they are today: nothing more than mock capital markets.

First of all, it is a problem of the government. It has long been the case that state owned shares are not tradable, resulting in control continuing to be held by the government - no matter that companies might have already gone public. It is heavily ironic that since 2002 there has been much debate on this subject, but that - now the problem is about to blow up - the subject is no longer under discussion. This issue alone plays an important part in whether China's A-share market continues to be a mock one in which investors are controlled by the authorities, or whether it becomes a real one in which control is ceded to the markets. The State Council's "Nine Articles" on the Development of PRC Capital Markets issued in February this year was a fudge, offering guiding principles rather than reforms. All this hot air and indecision from the government only makes me feel more gloomy for the future.

Secondly, it is a problem of the regulators. The imbalance between the power and the responsibility of the CBRC was brutally forced into the open after the arrest in November of Wang Xiaoshi. Wang is alleged to have taken bribes to reveal the identity of persons with the authority to approve issuance applications. As for this listing mechanism - which allows a group of secret ‘experts,' after reading documents in compliance with regulations, to decide which companies can go public, but which makes them unaccountable for these companies' future - I have no comment other than to say this is the peak of perfection. This mechanism allows companies to go public only with the government's approval. Whenever I think of Wang Xiaoshi's List, I don't know why but it always makes me think of Schindler's list.

I still cannot see how, if listed companies are unable to provide competitive returns to shareholders, funds made up of listed companies' shares can create value?

Thirdly, a serious crisis amongst China's securities houses emerged in 2004. Seven securities companies were taken over successively. It should be said that since 2001, when the bubble in the markets started bursting, a 2002 report issued by Li Xiaoxue of the CSRC disclosed that half of the US$7.6 billion net assets of 118 China's securities houses had evaporated. BNP Paribas Peregrine independently confirmed this in a report of their own. Today most of China's securities houses are technically bankrupt. The problem that needs to be faced now is how first to rescue investors, and only then the bankrupt securities houses, rather than focusing on the securities houses first.

The foregoing is not to say there has been no good news for 2004. Perhaps the best news has been that commercial banks are likely to be allowed to establish their own fund management companies, thereby indirectly entering into the markets. But I still cannot see how, if listed companies are unable to provide competitive returns to their shareholders, funds made up of listed companies' shares can create value?