THE Chinese stock market, as an economic indicator, is showing signs of a disconnect.

The Shanghai Composite Index was nearly flat from 10 years ago, while Chinese gross domestic product has surged fourfold to more than 40 trillion yuan (US$6.34 trillion) and the price of pork, a dinner-table staple, has jumped to more than 30 yuan a kilogram from 12 yuan.

In that same 10 years, the number of listed companies in China has more than doubled to more than 2,300.

It has been a hard year for stock investors. Older investors, who have put their retirement funds in stocks, thinking them a safe nest egg for the future, may have ended 2011 with only half of their initial investments and sunken hearts.

A China Securities Journal survey found that 86.6 percent of investors were "very dissatisfied" with the stock market. Many investors blamed the cooling domestic economy and financial woes in the West for their shrinking investments. Some also pointed the finger at poor corporate earnings.

I was surprised to find that lax market regulation was not included in the blame game. I think a lot of ordinary investors, myself included, believe that the market regulator should be shouldering greater responsibility for poor stock performance.

With tight oversight by the China Securities Regulatory Commission somewhat lacking, newly listed companies, big shareholders, inside traders and even the social security fund seem to be creaming the benefits from the market while small, individual investors bleed.

Insatiable thirst

China mainland's stock market has led the world in two contrasting ways in 2011.

On one hand, it was the world's largest market for initial public offerings for a second year running, with 281 new companies making their debuts on the Shanghai and Shenzhen exchanges. The IPOs raised more than 280 billion yuan.

On the other hand, China was among the worst performing stock markets in the world. The Shanghai Composite Index slid nearly 22 percent, and the Shenzhen Component Index tumbled more than 28 percent.

If economic growth and corporate earnings were the decisive factors in stock market movements, the Chinese exchanges should have been big winners in 2011. Combined profits of listed companies rose more than 18 percent in the first nine months, market watchers calculated, based on corporate financial reports in the third quarter. Gross domestic product is expected to show about 9 percent growth for the year.

That leaves many analysts blaming the market declines on too-rapid expansion of capital markets and companies' insatiable thirst for money through initial public offerings. The result is a market drained of liquidity.

In the past two-and-a-half years, 961.4 billion yuan has been raised through initial public offerings, and another 1.19 trillion yuan has been raised from the stock market through refinancing offers.

A China Securities Regulatory Commission panel of 25 is responsible for handling initial public offerings of the two main boards in Shanghai and Shenzhen and the SME board. Though there are no verified reports of bribery related to those CSRC members, the suspicion of funny money changing hands persists, according to market watchers.

"We can seek to explain the weak market in the sluggish economy overseas and in China's tightening policies, but the main reason is an unbalance of demand and supply in the market," Hong Ming, president of Rising Securities, wrote in a commentary. "The regulator should control the tempo of new share issuance and lift standards for IPOs."

Resign for profit

Huge fund-raising activity coupled with insufficient restrictions on the right to dump shares immediately after an IPO have made the stock market a place for big shareholders to make a quick killing.

An estimated 1,264 top corporate executives resigned in 2011, a 70 percent increase from a year earlier, even faster than the increase of listed firms. Many of those who have left are from companies listed on the Chinext and SME boards - two smaller markets for start-up and technology firms that have delivered individual investors the biggest losses.

Not all top executives who resigned were holding shares in their companies, and those who did weren't necessarily selling them, but some analysts link the rush of departures to share selling.

For example, in December, Tang Shixian resigned as general manager of Weihai Huadong Automation Co after cashing in 12.8 million shares worth 191 million yuan in the past six months. Shenzhen Terca Technology Co board member Ling Zhaowei earned 156 million yuan when he left his post and sold his shares.

Data from the Shenzhen Stock Exchange showed that as of the end of September, 62 of 495 top executives who left companies listed on Chinext, the Chinese equivalent of Nasdaq, had cut their holding of shares in their companies.

"The current system favors fund-raisers instead of investors," said Li Daxiao, a chief researcher of Yingda Securities. "The system should be adjusted to better protect investors."

The regulator could encourage executives to focus on running their companies rather than making personal gains by extending the period when an executive is barred from selling stock after leaving, Li added.

Insider dealing

And then there is the old chestnut of insider trading. Those working in the markets have access to valuable information denied the public at large. Last week, the securities regulator and the police announced that a seven-year crackdown on insider trading had netted 50 cases involving 4.5 billion yuan.

Last year, Li Qihong, a mayor in the southern city of Zhongshan, was sentenced to death for taking bribes and making more than 19 million yuan by trading shares in Zhongshan Public Utilities Group. She was in charge of restructuring and listing of the company. Three other officials from companies and governments have been jailed or sentenced to death with a reprieve for making a total of 115 million yuan by taking advantage of insider information. It is hard to imagine how many equally guilt traders have gone undetected.

Market prophet

Another big winner in declining markets has been the government's social security fund, with nearly 900 billion yuan under management. The law allows 30 percent of the fund to be invested in the stock market. Official data show that the fund has made average annual profits of 9.75 percent from 2000 to 2010.

Market watchers have pointed out, tongues in cheek, how the fund's managers always seem to show perfect timing in their trading decisions.

"During the boom of stock market in 2007, profits of the social security fund surged 43 percent," said Ye Tan, an independent economic commentator. "The fund has been receiving special treatment, with grants of state-owned shares and accurate timing of buying and selling." She noted that 31.9 billion yuan of state-owned shares were transferred to the fund in 2010.

"If the fund were just an ordinary investor, without the benefit of preferential policies, its fate in the stock market would be worrisome," Ye said. "But if the fund continues to be a 'prophet' of the market, the tears of ordinary investors won't dry up."

The regulator has acknowledged problems in the markets and pledged to tighten its supervisory controls. Still, China's IPOs show no signs of slowing. An estimated 300 billion yuan of new shares is expected to come to market in 2012, according to Wang Yang, a partner with Ernst & Young.

The regulator is also talking about allowing 20 percent of the government's 2 trillion yuan pension fund to invest in stock markets, arousing fears that the "charmed" track record of the social security fund will be repeated, to the detriment of small shareholders. Individual investors who hold on to their shares and swallow losses can only hope that the situation will brighten in 2012.