Although Federal Reserve Bank of Boston President Eric Rosengren's remark that the US Fed will take real action to raise the interest rate was deemed as a major contributor to China's stock market slump, analysts agree that investors' selling spree can be attributed to the CSRC's new "green-listing" policy. The Fed held off the interest rate hike.

Why did the policy dampen investors' mood?

Misunderstanding aside, investors' longstanding distrust of the regulator is a main cause of the slump. In the stock market, only the best and most competent companies can have access to financing to expand their businesses, which in turn benefits investors. But China's stock market has been criticized for going awry by allowing some dubious companies to get listed, causing losses to investors.

Although the regulator has vowed to strengthen the IPO approval process, it will need time to win back the trust of investors. The well-meaning listing policy for enterprises from the less-developed regions has triggered concerns among investors that the regulator may allow such enterprises to cook their books to get their IPO applications approved.

To dispel such misgivings, the CSRC needs to more clearly explain to the public that it will not allow that to happen. More importantly, it must show the public that it is capable of strengthening the IPO approval process as well as regular supervision of already listed companies to prevent them from cheating investors.

To solve the problem at the root, the CSRC must also make efforts to facilitate the revision of the existing Securities Law so that companies using unfair means to make profits get harsher punishments.

According to the Securities Law, a listed company that releases false or misleading information faces the maximum fine of only 600,000 yuan ($90,000) and the person responsible for the crime can be fined up to 300,000 yuan. In contrast, such fraudulent acts can easily cause investors tens of millions of yuan in losses and seriously disrupt the market order. As such, the punishments are too lenient to prevent crimes.

The author is a senior writer with China daily. xinzhiming@chinadaily.com.cn