The reforms are expected to be enforced by a number of government bodies including the China Securities Regulatory Commission headed by Zhou Xiaochuan.

'A healthy development of stock markets first entails healthy companies with good corporate governance. Since the majority of the listed companies or those expected to list are SOEs, a more radical SOEs reform is key to stock market reform,' the report said.

Real corporations were 'the ultimate target of the SOEs reform, without which there will be no real accountability and in turn no healthy and sustainable development for the SOEs', the bank said.

To achieve this, three issues needed to be tackled. First, the shareholding structure of the shareholding companies - listed or non-listed - should change to allow for more non-state investors. For the listed companies, the non-tradeable shares owned by the state or 'legal persons' - namely, government bodies or institutions - amount to an average of 62 per cent.

Secondly, overstaffing remains a problem at the state sector. 'Despite the stepping down of some 25 million workers in the past five years - or about a fourth of the total workforce of SOEs - overstaffing remains a major problem for most SOEs,' the bank said.

'The resolution of this problem would depend on how fast the Government could reform the social security system.'

Lastly, policy burdens remain at large SOEs despite attempts to separate Government from enterprises.

'As a result, these enterprises are still unable to operate commercially,' the bank said.

The report said improving the regulatory regime was of utmost importance. Among the complaints is the Government's influence over the stock markets which has given rise to high volatility and policy uncertainties.

'A modern accounting system for listed companies is critical to the modernisation of stock markets,' the report said.