The Standing Committee of the National People's Congress, China's highest legislature, has adopted a national law which will overhaul the as yet unregulated industry.

The new 214-article law, which will come into force on 1 July 1999, will be wide-ranging. It will revamp the issueing and trading of stocks, the purchasing of listed companies, provides for registration and accounts settlement agencies and the setting up of government regulatory bodies and spells out penalties for those violating the law.

Brokerage companies lose out

The law is designed to clamp down on those stock brokers who misuse the money of investors for dubious speculations. But the ban will also deprive many companies of the revenue needed to survive and could force them out of business.

"Many securities companies will merge or combine. This will make the business even more difficult," said an analyst at Jilin Securities Co.

Brokerage houses earn extra revenue by depositing their clients' idle funds in bank accounts that earn a much higher rate reserved for non-bank financial institutions.

Li Peng believes the law will protect the rights of investors

The securities industry will be separated into two tiers, with brokerages required to separate their own trading accounts from those of their clients.

The head of the National People's Congress, Li Peng, said the law would be important in "protecting the legitimate rights and interests of investors, preventing and resolving financial risk and guaranteeing the healthy development of China's fledgling securities market."

The law will also prevent foreign investors from buying shares in China's A-share market, which is only open to domestic buyers. They will be limited to the less active B-share market. Chinese banks and state companies will also be prevented from trading in equities.