Yet in China, where the economy has been racing ahead at an 8 per cent annual pace or better for years, A-share markets have been heading in the opposite direction. The Shanghai index dropped 5.3 per cent over the 24 months in 2002-03, while the Shenzhen index fell by an even more precipitous 18.5 per cent.

These declines have continued into this year, with Shanghai shares slumping 12.2 per cent in June and July alone, and their Shenzhen counterparts falling 13.8 per cent.

This dichotomy between surging economic growth and a protracted bear market is worrying. Flawed market structures and poor corporate governance ensure that the country's capital is being misallocated and wasted.

The feeble state of China's domestic equity markets is also delaying the country's move to full currency convertibility, considered crucial for China's long-term integration with the global economy.

During the short-lived revival on the stock exchanges earlier in the year, the government appeared poised to implement a qualified domestic institutional investor (QDII) scheme, which would allow mainland investors to channel capital overseas in search of the best possible returns.

Such a reform would ultimately translate into de facto currency convertibility on the capital account.

As the markets again turned south, it became clear that QDII would deal a death blow to local capital markets. As long as the markets languish, capital-market convertibility again appears a distant prospect.

The pessimism afflicting China's markets is far from irrational.

'Resources haven't been allocated to efficient and productive companies,' said HSBC China economist Qu Hongbin. 'In turn, this deters better quality companies from listing, no thanks to the poor market conditions.'

China's biggest and better quality state firms - PetroChina and Tsingtao Brewery - now routinely choose overseas listings, even though they could command higher valuations at home.

There are exceptions, such as Shanghai Baosteel, which enjoys considerable institutional investor respect. But for most of China's 1,200 or so listed firms, corporate excellence remains an alien concept.

This week, the China Securities Regulatory Commission (CSRC) fined Shanghai-listed China Sichuan International Co-operation and Zhongken Agricultural Resource Development a combined 900,000 yuan for poor disclosure, illegal stock trading and misappropriation of funds. Over the past two months, 26 firms have been investigated by the CSRC.

Corporate quality aside, the issues bedevilling China's markets date to their re-establishment - after a 50-year hiatus - in 1990. It was perhaps a telling sign that Shenzhen, eager to beat Shanghai to the punch, launched its stock exchange without formal approval.

China's securities regulators have grown more sophisticated, but long-standing structural flaws remain that will take enormous political will to correct.

An example lies in the estimated 70 per cent of listed company shares that are held by government entities but not traded.

Cash-strapped bureaucracies want to liquidate these so-called 'state shares', but have been held back for fear of pummelling the markets. Until a solution is found, investors will tremble warily under the overhang these shares create.

'The state share issue was a problem from the start,' said Yao Maogong, a manager of Shanghai Securities.

In an early effort to test these dangerous waters in June 2001, three listed companies were allowed to sell off state shares in Shanghai and Shenzhen to raise funds for restructuring.

Shares plunged. The pilot programme was suspended in October 2001, but markets have never fully recovered.

However, there are signs that China is willing to try again. Last week, the National Development and Reform Commission and CSRC agreed to allow state firms to repay debts owed to their listed units with state shares, a move seen as a prelude to more thorough reform.

The equity handed over to the listed units is supposed to be written off eventually, which should appease minority shareholders.

Hunan TV & Broadcast Intermediary is the first listed firm to leap at the new opening. Its directors accepted debt repayment from its parent in the form of shares independently appraised at 7.15 yuan, against a market price of 10.23 yuan.

Investors withstood the market jitters prompted by the lower valuation. After an initial dip in days after the deal, Hunan TV's shares closed yesterday at 10.27 yuan.