Chinese investors have been choking on the bitterness of seeing their stocks nosedive since last October. In some cases the value of their stocks has been slashed by half.

Because of the onset of a global recession, the huge refinancing plans of listed companies, and a large number of restricted shares being made tradable, the benchmark Shanghai Composite Index lost 40 percent in five months, dropping from a peak of 6,124 points to around 3,700. The value of the mainland A-share market lost nearly 10 trillion yuan ($1.4 trillion).

This was the second biggest drop since the stock market system started in 1990. The first took place from June 2001 to June 2005 when the benchmark Shanghai Composite Index dropped to around 1,000 points from 2,200 points, losing 55 percent. The root cause of the sharp drop was the policy making state-owned shares tradable. Large numbers of state-owned shares were dumped, directly leading to stock market implosion.

Compared with the first slump, this round has been triggered by market factors, especially the panicky atmosphere that has haunted investors.

The market turmoil has caught the attention of all walks of life. Chinese Premier Wen Jiabao, who rarely talks about the stock market in public, stated on March 18 that the government "is paying close attention to the stock market." Confronted with worried investors and the asset bubble, the securities watchdog has been put on the spot.

Nature vs. nurture

Whether the government should intervene in the stock market is a predicament for the China Securities Regulatory Committee (CSRC). Vice Chairman of CSRC Fan Fuchun has made contradictory statements during two of his most recent public speeches.

The mainland stock market was accused of being a policy-driven market in the past. In the past two years, the accusations subsided as the market kept improving. With this in mind on March 13, the first day the stock market dropped under 3,900 points, Fan said the CSRC would not play the role of market rescuer and would not repeat past mistakes.

Yet the next day, Fan noted that the government "would not leave the stock market alone."

The CSRC is not the only one wondering which is the right course. Many economists have come away with contrary opinions.

Andie Xie Guozhong, a well-known economist, contends that the government should not rescue the stock market. Xie said that market fluctuation was normal market behavior and that investors should be prepared for the ups and downs. They should not rely on or wish for government intervention, he said. Xie concluded that in a full market competition, government intervention would not have much impact, citing how little impact the U.S. Federal Reserve's repeated interest rate cuts have had.

Shen Minggao, Chief Economist at Citibank China, noted that the A-share market slump was related to the uncertainties of the U.S. economy and the weak overseas market. These outside influences deteriorate investors' confidence, but government intervention would have little effect, he said.

Shen said the government's assistance would probably help boost investors' confidence, but these actions would need to be repeated. Even with action, the uncertainties haunting the stock market have not disappeared, making the government's efforts less effective.

Shen called for investors to have confidence in the self-adjustment of the A-share market and believes the market will turn for the better.

He Qiang, professor of finance at the Central University of Finance and Economics, contends that the government should come to the rescue. He believes the mainland market drop showed how vulnerable it is to the economic uncertainties triggered by the U.S. subprime mortgage crisis, which dragged down the Hong Kong stock market and in turn brought down the mainland market.

He said the mainland stock market is currently very weak and some institutions have shorted their stocks. Furthermore, the market slump was also influenced by excessive speculation, which needed government supervision, he said. Therefore, he believes the watchdog should stabilize the market by adopting encouraging policies.

He said that the panic stock selling and the declining net value of mutual funds have led to investor demand in redeeming mutual funds, forcing them to sell their stocks, and in turn further dragging down the stock market. He claimed the government should stop that in order to protect the interests of investors. If the market measures cannot help, policy measures must be put in place, said He.

Deng Yuwen, senior editor with the Study Times affiliated with the Party School of the CPC Central Committee, contends that the function of the stock market in China's economic development determines that the government should not leave it alone.

Deng said that whether the government would rescue the market was a question of its attitude, and how to rescue it was a question of their ability. The right attitude would show the government's credibility. As long as the regulator demonstrated its determination to rescue the market, Deng said, many problems would be healed by themselves.

Xu Wei, an analyst at Sinolink Securities Co. Ltd., said in terms of boosting investors' confidence, it is necessary for the government to intervene. Even though the recent market plunge was caused by both domestic and international factors, the lack of investors' confidence was also one of the major reasons. Xu said judging by the present market, there is no major power underpinning investors' confidence.

How to rescue?

Though controversy exists, the watchdog also wishes to stabilize the market.

Since February, the CSRC approved 21 new mutual funds, 15 of which are equity funds or hybrid funds. The 15 newly added funds could bring at most 100 billion yuan ($14 billion) into the market.

However, the stock market defied the issuance of new funds or the introduction of more money, and continued to drop. The launch of new funds has had less and less positive influence on the stock market.

A mutual fund insider said the continuous drop of the stock indexes has killed investors' confidence. Even if there were lots of new funds, a majority of purchasers were pessimistic.

The recent attitude of the CSRC showed the government's concerns over further measures. It might fear further intervention would hurt the positive image it formed during the past decade and fear to repeat the past mistakes of a policy-driven market.

At the same time new mutual funds lost their glamour, people also called for the reduction of the stamp tax on stock trading.

Last May, the stamp tax rate was raised to 0.3 percent from the previous 0.1 percent, making the stamp tax income of the government in 2007 to 200.5 billion yuan ($28.2 billion), 11.4 times more than the figure in 2006.

He Qiang said the current stamp tax rate was too much. He said the total stamp tax in 2007 exceeded the aggregated amount of the past 16 years. The heavy stamp tax raised the transaction cost, reduced transaction efficiency and added more risks to investment.

He believes reducing the stamp tax would be the effective way to save the crumbling stock market. At present, China's stamp tax is the highest in the world, and is charged both ways whether it is selling or buying the stocks. He said reducing stamp tax could help boost investors' confidence.

The CSRC did not give an indication about its attitude on reducing the stamp tax. But according to a person in the know, the CSRC had already passed a stamp tax reduction plan, but it was not the perfect time to announce it for two reasons. First, the stock market had dropped about 35 percent over the past five months and a large rebound was expected even if there was no good news to stimulate the market. Second, the stock market is not at all hopeless, and needs stability instead of rescuing.

But the person also disclosed that the CSRC had more concerns. The mainland market is increasingly influenced by the international market fluctuations. Under the circumstances of major international market slumps, if the stock market did not rebound as people expected, it could be a deadly blow.