Nation's bourses enter new era of regulation

The startup board, or the ChiNext, and the country's leading over-the-counter marketplace, the New Third Board, have attracted huge investor interest and high valuations.

"The average price-earnings ratio for stocks on the main board rose to 25 times from 13 times when the benchmark index increased to 4,000 points from 2,000 points, which is reasonable," said Liu.

"But after the Shanghai Composite Index blew through 5,000, bubbles have inflated. The ChiNext average PE ratio, which increased to about 145 times recently, is abnormal," he said. In the first five months of this year, the stock index rose 45.7 percent year-on-year, the largest gain in the world. But the market's path has not been entirely smooth.

On June 12, the Shanghai Composite Index reached a seven-year high of 5,178.19 points during the trading day. But the gauge has since plunged on concerns that valuations lacked fundamental support and a flood of new listings could drain liquidity from existing equities.

The volatility in China's stock market is also a rare development since the global financial crisis, experts said. "The 4,000 level may be a new bottom for the index, even though large fluctuations are possible in the near future," said Liu, who believes the government will act to stabilize the capital market.

"The Chinese stock market is more sensitive to government policies than are markets in other countries. The leadership sees it as an important strategy to strengthen the capital market and will make it an attractive investment target for global funds."

He added that the capital market will be a key engine to raise funds to achieve the "Chinese Dream" initiated by President Xi Jinping. However, the regulations need to be improved to facilitate sound development, or unexpected volatility may cause systemic risks, the expert said.

He pointed to conditions on the ChiNext, where he said that some share holders have stakes of as much as 80 percent in a company. When the stock price rises, the major shareholders tend to reduce stakes without full disclosure. Under such conditions, prices can plunge and hurt small individual investors. According to Wind Information CoLtd, as of June 8, senior executives at 227 ChiNext-listed companies had sold shares worth 33.94 billion yuan ($5.54 billion).

"We should watch this situation closely. Those who hold more than 30 percent of a company's stock should be restricted when it comes to selling shares, and they should have to make timely disclosures. Independent directors should not be appointed by major shareholders, or the two groups may collude to manipulate a company's share price."