How far off is a healthy stock market?

Although Chinese shares saw moderate gains on Wednesday, investors have little expectation for a market that has remained depressing for several years.

When the State Council started to promote growth of the capital market on May 9, some analysts began talking about ten years of bull market, and the Shanghai Composite Index responded with a 2 percent rise on the next trading day; then the index headed steadily South till Tuesday.

During Wednesday's trading, the index once dived to a two-month low of 1,991 points before rebounding by 0.84 percent to 2,024.95 points.

Trading volume remained at the lightest level since early this year, with investors scared off by volatility and seeking more reliable investments, such as money market funds. New A-share accounts registered during the previous week dropped to 64,000, the least since 2007.

From May 12 to 16, the number of A-share accounts that held shares stood at 53.63 million, much fewer than Yu'ebao users, a wealth management product from online payment platform Alipay. Yu'ebao had 81 million clients at the end of February.

It is not hard to understand why investors move their money away from the stock market. Since August 2009, Chinese shares have maintained a clear downward trend, down from 3,478 points to around 2,000 at present.

In many investors' minds, the Chinese stock market has decayed into a gambling den where companies make fortunes overnight just by being listed, not a platform for investment and corporate financing. This is very far from what China wants.

China wants a registration-based initial public offering (IPO) mechanism, a multi-layer equity market, high quality listed companies, an improved delisting system, just and equitable market order, and protection for the interests of small and medium investors.

The current A-share market still fails to play any role in allocating resources, said Wang Qing, president of Shanghai Chongyang Investment Management: "The market's investment value and its function for corporate financing are both insufficient."

Development of the stock market will contribute to healthy economic growth, as the means of financing does not increase debt burdens of companies, he said.

Investor interests must be protected if the market is to grow in the long term. Hu Ruyin, chief economist with the Shanghai Stock Exchange, said authorities should think twice before use halting IPOs as a way to stabilize a downward trend. That may sustain share prices in the short term, but investors have to pay a higher price for shares afterward, which in turn jeopardizes their interests.

"There must be strict supervision and harsh punishments for insider trading and other violations on the stock market," Hu said.

Lack of supervision from judiciary organs and securities regulators is largely to blame for violations by listed companies. Fraud in financial reports of listed companies arise partly due to insufficient supervision and punishment.

Last week, Nanjing Textiles Import and Export Corp. said in a statement that it was penalized by the regulator for artificially raising its profits from 2006 to 2010 by a total of 344 million yuan (55.8 million U.S. dollars). The corporation was fined only 500,000 yuan.

Hu wants it to be easier for investors to get redress through legal means when their interests are damaged, but that would depend heavily on progress in the legal system.