Hu Ruyin agrees with Shang, saying that the Chinese capital market is still lagging behind major markets. "There are several aspects showing our disadvantages," Hu said. "For instance, the two basic ingredients of a capital market are a free economy and the rule of law. We are working toward these goals, but so far, we are not yet successful."

"Although the total market value of China's stock markets ranks sixth in the world, the capital market is still immature," Hu said. The current tradable market value in the A-share market is less than 10 trillion yuan ($1.33 trillion), which leaves it far behind the developed markets.

Hu said that individual bank deposits exceeded 16 trillion yuan ($2.13 trillion), jacking the assets in the banking system up to nearly 40 trillion yuan ($5.33 trillion). The mere 10 trillion yuan worth of tradable stocks reflect a serious imbalance of supply and demand in the domestic capital market.

Qi Bin, Director of Research Center at the CSRC, agreed with Hu. On October 26, Qi pointed out that securities products were short of demand in the Chinese capital market. For a long period of time, China focused on the development of the stock market, while the bond market has remained underdeveloped.

Qi believes there has been a lack of a real supervision system under the current stock market and an immature credit system. Stock prices cannot effectively influence company behavior, the access and exit mechanisms need to be improved, and mergers and acquisitions of listed companies show signs of relatively strong government intervention, said Qi. Meanwhile, financial turbulence in neighboring countries is more likely to affect the stability of the Chinese capital market. The Chinese capital market is in urgent need of establishing and perfecting supervision and risk-control mechanisms, Qi added.

Fee-fi, ho-hum…

China is still a developing country and has a long way to go before it becomes a real capital giant.

Deng Yuwen, Associate Editor-in-Chief of Study Times affiliated to the Party School of the Central Committee of the Communist Party of China, pointed out that the capital market has three functions: financing, pricing, and resource allocation. Deng said the three functions have been constructed to some extent but haven't yet fully played their intended role.

Deng said that the mainland market has raised over 520 billion yuan ($69.33 billion) since 2006, 120 billion yuan ($16 billion) more than the total capital raised in the previous five years. Initial public offerings (IPOs) of leading companies and big state-owned companies in the mainland stock market have propped up the direct financing of Chinese companies. However, compared with indirect financing, capital raised from the stock market is still small.

According to statistics from the central bank, financing derived from the stock market accounted for 8.4 percent and bond financing 13.9 percent. The majority of companies still depend on bank loans for capital.

The biggest challenge to the Chinese capital market is that the stock market has entered a risky stage. Blue chips are leading the price hikes in the financial, real estate, iron and steel, coal and aviation industries, pushing the stock indexes to record highs. The share price of China COSCO Holdings Co. Ltd. increased 160 percent in a month. Aluminum Corp. of China surged 100 percent in August. Deng said it was self-deceiving not to admit there could be blue chip bubbles.

Deng said the average price/earning ratio in the A-share markets had reached 87.75 if taking into account the 2006 annual reports of listed companies. However, the lessons learned from Japan and Taiwan showed that a price/earning ratio reaching 60-70 suggests a bubble climax. This means that the Chinese stock market is extremely overvalued. If the bubble bursts, the aftermath could be destructive.