China has found generating breakneck economic growth far easier than resuscitating its listless A-share stock markets. More vexing is that its H shares in Hong Kong have soared, while A shares listed on the mainland are shunned by investors still burned by share price manipulation, accountancy frauds and a botched government plan to unload state shares. The State Council says it has some new stock market reform plans, but has it learned from past mistakes? Mistreat the fickle equity market and it will break down. Investors will thank you for good companies coming to market, but they might not be the ones you want to list. Offload your junk on them and they will not return. Such was the outcome of the plan to sell a large portion of state-owned shares in 2001. While the result of shoddy state-directed lending is limited to non-performing bank loans, the damage caused by similar state-directed intervention in the equity market is worse. Not only do shareholders suffer, but the equity funding tap for everyone else is shut down as confidence evaporates. So recent announcements that China is seeking to move its equity markets in a 'market-orientated manner' and withdraw from its earlier direct intervention should appear welcome. The issue of adjudicating new issues will be handled by a professional listing body and private firms can also list. But the hangover from the previous regime - when poor-quality state-owned firms were led to the market - remains. Many still need to sell down non-tradeable state-owned shares, about 60 per cent of China's stock market capitalisation, to finance pensions and other obligations. These are to be dealt with on a case-by-case basis so that one issuance cannot trigger a deluge of 'me too' transactions that derail the market. The other ingredient needed for a functioning market is a long-term institutional equity culture rather than one depending mainly on the trading of retail investors. Another policy will permit life insurers to invest premiums directly in equities rather than through equity funds. China's social security fund has been investing in the market since last year and qualified foreign institutions also have limited access. Restrictive five-year investment lock-up periods and uncertainty over capital gains policy will limit meaningful foreign participation in the near term, although their presence should hasten the adoption of better equity valuation techniques by members of China's fledgling fund management industry. Savvy investors will want to know what tools new foreign players are using - if that helps them make money. But with more than 90 per cent of the market still traded by individual investors, the retail trading mentality will not disappear overnight. And retail investors will need to see share prices going up, not just grand policy pronouncements, before they regain confidence. The A-share market has made a small rebound this year and new issues are again attracting attention. TCL, a quality private company chose a domestic listing last month and its share price has since doubled. China does seem to be making the right noises for its equity industry to develop. But the biggest factor is how soon the retail investor reawakens. If inflation keeps growing and interest rates remain low, the equity market may again appear a risk worth taking.