Move in line with economic reform but more change needed to improve China's stock markets.

In late November, China decided to resume initial public offerings in January after a freeze of more than a year. Along with the decision was a new set of rules governing the issuance of IPOs.

The basic aim is to establish an IPO registration system that breaks away from the previous approval system.

The China Securities Regulatory Commission will be responsible for examining applicants' qualifications, leaving investors and the markets to make their own judgments about a company's value and the risks of buying its shares.

Previously, listing hopefuls underwent a complicated application process that could involve multiple rounds of reviews and take several years before receiving approval from the CSRC. The approval system mostly focused on the profitability of the applicant, and the agency was criticized for a tendency to lean toward big state-owned companies.

It is obvious that the new measure is in line with China's ambition to let market forces play a more "decisive role" in its economic reforms. With the establishment of an IPO registration system, the government will change its role from a market manager to a regulator in the real sense.

Other new rules include giving more power to share issuers and underwriters to negotiate the offering prices, allowing retail investors to subscribe more to popular IPOs and checking excessively high valuation.

All the changes are positive, but more measures are needed to make sure these changes yield expected results.

China's stock markets have many problems, but the root problem lies in the overall poor quality of its more than 2,000 listed companies.

A huge majority of the traded companies regard the stock market as either a capital pool or a private coffer for their executives, or both. They draw funds from the pool by launching IPOs and selling new shares, or converting stakes in companies into personal fortunes by selling their holding. Sharing the proceeds with investors, especially retail investors, is the last thing on their minds, despite their promise of respecting anyone who holds their companies' shares.

The same line of thinking could very well explain the fact that Chinese companies have never been generous in paying out dividends.

Local investors, however, have to bear the brunt of such a pool of poor-quality companies because they have few other choices. Investment channels remain very limited for Chinese people, who are not allowed to freely invest in overseas stock markets. Except for domestic stocks, gold and real estate, banking saving seems to be the only popular choice for any ordinary Chinese investor.

This partly explains why China's stock markets continue to see their daily turnover running high, even if they have become one of the world's worst performers in the past two years.

To cure the market, a combination of "bringing in" and "kicking out" may help.

Bringing-in means introducing more quality companies. From that perspective, the launch of an international board could be fresh air to China's stale stock market.

The idea of an international board was hotly discussed a few years ago, but it was put on shelf after policymakers believed it more important for China to reform the market first.

But these two moves – deepening the stock market reforms and launching the board – are not mutually exclusive. An international board could help China press ahead with the market reforms that seem to have reached a deadlock.

A number of vibrant global companies such as HSBC, McDonald's and Coca-Cola have expressed interest in listing in China. Such names could perk up the local bourses, and more importantly, offer good returns to investors.

The best catalyst to revitalize China's market is competition. Pressure from rivals could give the listed Chinese companies a kick in the rear that would bring about the desired level of operational performance, or lead to them being out of the game.

China should not be afraid of that kind of competition. Past experience has shown the more open an industry is, the stronger and faster the Chinese companies grow.

The second approach is to "kick out" unqualified companies. In this sense, the delisting system for China's stock markets urgently needs to be revamped.

At present, the system mainly focuses on the profitability of a company. The policy prompts listed companies to use all kinds of means, such as accounting methods, to polish their bottom-line figures to stay listed. As long as a company can make profit by accounting standards, it can remain listed. That's why China's bourses have a lot of companies that actually stop operations and wait to be sold as a shell.

In foreign bourses, profitability is not the only yardstick. Other requirements such as revenue scale, the number of shareholders and dealers are also included. Under these criteria, if a listed company is not performing well or not active in trading, it faces the risk of delisting.

The difference between the systems resulted in a sharp disparity in delisting ratios. In China, the delisting ratio was 1.8 percent, while it hit 8 percent on Nasdaq, 6 percent on the New York Stock Exchange and 12 percent on the AIM in London.

This speaks volumes of the significance of a sound elimination mechanism, without which, the overall quality of China's stock markets will surely deteriorate, as is currently the case.

The author is a Shanghai-based analyst.