Mainland finance regulators, meanwhile, know that the issue of non-tradable equity must be resolved before the country's languishing stock markets can ever emerge from their four-year slump.

The state and legal-person shares constitute a massive overhang that quickly smothers any market rally. They are the key reason why mainland stock exchanges have been among the worst-performing in the world even as the economy has rocketed.

On May 9, the China Securities Regulatory Commission (CSRC) announced four companies had been given permission to sell their non-tradable shares. Shareholders of two of the companies approved plans to sell the shares, those of a third rejected the sale, and those of a fourth, Hebei Jinniu Energy Resources, will vote today.

On May 16, CSRC chairman Shang Fulin said the process was like an arrow that would not return - that is, the sales had to proceed.

The group of four firms is only a start and the long-term plan is to sell the non-tradable shares in all listed companies.

Since a CSRC official first announced the sales on April 13, the Shanghai Composite Index had fallen to touch an eight-year low on June 6.

Yu Gang, the head of research at Citic Securities, said: 'The major reason for the fall in the market is the suspicion over the level of compensation paid to shareholders in the four companies.

'They are not being compensated adequately.'

Han Zhiguo, the chief of research at Beijing Banghe Caifu research centre, said the proposals being offered by the four were far less than the market had anticipated.

Lang Xianping, a professor of economics at Chinese University of Hong Kong, opposes the sales.

'The healthy development of the market requires confidence in companies. But the sale of state shares destroys the public's confidence in companies, which will prevent the market developing,' Mr Lang said.

'Other countries, like Britain and Singapore, have also sold state shares. They did so while protecting investor confidence and choosing their best companies. But, in China, we are doing it with all the companies, good or bad. This is contrary to the basic principles of the stock market.'

Wang Lin, a researcher at the Trust and Fund Research Institute of People's University, said the sales would overwhelm markets.

'Currently, there are 500 billion non-tradable shares and 200 billion tradable shares,' Mr Wang said.

'If we do the process over five years, that means 100 billion new shares per year or an annual increase of 50 per cent.

'This would be a constant threat to the market and the outcome would be hard to predict.'

Peng Yunliang, an analyst at Shanghai Securities, has an alternative plan that would keep the two kinds of shares separate.

'The non-tradable shares should be changed into 'preferred shares' that could be exchanged in a separate market, with their own prices,' Mr Peng said.

'Tradable shares should continue to be traded in the existing markets. In addition, for a certain time, those holding tradable shares should not be allowed to buy preferred stock.'

In an editorial this week, the China News Weekly went further. It said the issue was no longer the sole domain of the CSRC but had become a complex social and political matter requiring a policy directive from the State Council or the National People's Congress.

'Among the 70 million individual stockholders, the average loss from trading has been 20,000 yuan. The distorted nature of stock ownership is the result of the government's desire to raise money cheaply for state firms and yet retain ownership of them.

'Behind the sale of state shares is the issue of inequality. Listing is a privilege. After the listing, the big shareholders have retained this privilege in relation to the small and medium shareholders. Along with state-owned brokerages, these big shareholders have cheated the small shareholders with fraud and embezzlement of assets.

'On this base of inequality, the sale of state shares will worsen the distortion of the market. The state must set a legal minimum for compensation for those who hold tradable shares. Only then can there be a good and fair result of this reform,' it said.

Shareholder anger boiled over last Friday when Tsinghua Tongfang held a shareholders' meeting to approve the equity sales and a compensation plan. Small investors took turns berating the management. 'How much do the big shareholders care about our interests?' many asked.

The plan offered them 10 more shares for each 10 they held. The company's chairman ruled out any negotiation. The small shareholders, however, held enough votes to prevent the plan from receiving the 67 per cent approval it needed.

THE LONG HEADACHE

Non-tradable shares: A chronology

Early 1990s: State-owned firms prepare for listing on China's fledgling stock exchanges. In keeping with Beijing?s ?socialist market? principles, about 67 per cent of the equity is earmarked for the state and designated non-tradable.

Summer 2001: Abortive attempt to introduce non-tradable shares sparks investor panic. Stock markets plummet and have yet to recover.

2005

April 13: China Securities Regulatory Commission (CSRC) says ?conditions are right? to begin floating non-tradable shares.

May 9: CSRC chooses four companies for a pilot scheme to sell stateowned shares.

May 10-13: Tsinghua Tongfang, Shanghai Zi Jiang Enterprise, Sany Heavy Industry and Hebei Jinniu announce compensation plans.

May 16: CSRC chairman Shang Fulin says ?reform is like an arrow, which, once fired, cannot return?.

May 25: Sany Heavy Industry improves its compensation plan under pressure from shareholders.

June 6: Shanghai Composite Index hits eight-year low of 998.23 points.