Stock investors are expected to see the end of a prolonged bear market in China in year 2004, due to a strong Chinese economy and a warmer policy environment.

Securities analysts and experts have predicted generally positive outlook on the bourses, which, after three years of consolidation, should be back on the upward track.

Most based their predictions on positive elements expected this year, for example the momentum of the Chinese economy, the launch of the long-awaited second board market, and most importantly, a whole basket of reform measures to improve market efficiency and quality of the listed firms.

"Generally speaking the market environment and activeness should be greatly improved from 2003," said Qiang Ying, head of the research institute of Huatai Securities.

Investors are also more rational in stock-picking and more base their judgment on the fundamentals of the listed firms, she said.

Power and energy sectors, which are expected to benefit from rising prices in coal, electricity, etc., would be more favourable for fund managers in their portfolios, said Zhao Xinyu, an analyst with the China Asset Management Co.

Those in the public utilities and banking counters also expect a solid growth.

The Chinese economy will be one of the biggest driving forces for the stock market recovery this year, said Wu Zurao, deputy director of the research centre of China Galaxy Securities.

China's economic growth in 2003 was widely estimated at 8.5 per cent and the momentum is expected to be maintained this year, which would generate growth of the corporate results in general.

An improving global economic climate will also benefit the Chinese capital market, which is opening up at a growing pace, following the adoption of the qualified foreign institutional investors (QFII) system and the launch of a batch of Sino-foreign joint venture securities houses and fund management firms last year.

A newly-released report by Morgan Stanley said that international investors had favoured Chinese stocks in 2003 and would keep the ration this year, as more large Chinese companies are expected to be listed overseas, including the China Construction Bank, one of the Big Four State-owned banks.

More overseas investment funds will be established to target Chinese equities, said C.G. Wu, general manager of Morgan Stanley.

He also said the large volume of expected new share issues would also affect the enthusiasm of investors that Chinese companies, especially the banks, still need to improve management and internal control.

Two years after China's entry to the World Trade Organization (WTO), China's stock market has been gradually moving towards the direction of deregulation, with the adoption of a series of market-driven rules.

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said recently that the authorities would continue to improve the market mechanism in the bourses this year and encourage product innovation.

The commission has started the reform on the share issue system to improve the quality of the listed companies, with the expected operation of the sponsor system in new share issues in February.

The sponsor system, which adds more liabilities to the underwriters on the quality of the stocks, will reduce administrative interference in listings and increase public supervision during the process.

On the other development, to ease the shortage of funds for small and medium-sized enterprises and the expansion pressure on the main board, China is also about to launch the long awaited second board market this year, insiders said.

The second board, targeting high-tech firms and start-ups, was shelved two years ago under risk concern. With the improvement on the regulatory system and market environment, it should be established in Shenzhen within the year and relative preparations have already completed, a source close to the matter said.

Some statistics:

Chinese companies raised 135.8 billion yuan (US$16.4 billion) in domestic and overseas capital markets in 2003, an increase of 41.2 per cent from 2002, according to CSRC statistics.

Altogether 82 companies issued A shares in 2003 and 23 H shares were listed.

The market transactions in the Shanghai and Shenzhen exchanges totalled 3.2 trillion yuan (US$386.4 billion) last year, up 14.7 per cent from a year ago.

By the end of December, the number of listed companies in Shanghai and Shenzhen had reached 1,287. Total market capitalization was 4.2 trillion yuan (US$507.2 billion). The number of stock investors in China had exceeded 70 million.

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