On December 14 at 1:39 p.m., the Shanghai Index reached 2246 points, exceeding the June 2001 historical high of 2245 points. Market observers are clamoring that the hour of China’s stock market reform is here and that the capital markets are entering a new bull era.
  
These exclamations seem excessively optimistic. We believe that in judging the significance of the new historical high we must ask ourselves first what changes the capital markets have gone through and second how this new high came about.
    
China’s securities markets most interesting development last year was the passage of shareholder structure reform on April 29th. The value of this does not need to be reiterated here. But aside from this, what other substantial changes have occurred? Have China’s securities markets truly cast off the shackles of bureaucratic control, largely relying on their own self-regulation and adjustment according to market conditions? Is it survival of the fittest listed company? Are the best firms being rewarded with rising stock prices, and the worst ones fading from the market? Is information moving efficiently? The answer to these and many other questions are not so positive after all.
    
Then what, after all, is the driving force behind the new high?
    
Some commentators believe that a main reason is the completion of shareholder structure reforms, which solves a problem at the core of our capital markets. But as was previously pointed out, aside from that, there have been no other fundamental changes to the securities markets.
    
In all likelihood, the 80 percent growth seen by indexes this year is the result of external forces such as the yuan's persistent appreciation, the flood of QFII funds into China, natural global fluctuations, influence by Hong Kong’s bull market being felt on the mainland, and other factors. Moreover, because large-caps like the People’s Bank of China and the Industrial and Commercial Bank of China are doing well, they are bumping up the indexes. With all this in mind, perhaps it is more appropriate to describe the market as in a stage of recovery or at a modest high.