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The increases of stock market valuations will be excluded from government evaluations of state-owned financial firms, China's Ministry of Finance has announced.

Analysts say the move is intended to deter financial firms from making asset valuations based on state-owned capital in shares that show only transitory gains.

Under regulations taking effect on March 1, equity value gains from initial public offerings or share placement by state-owned financial firms will no longer be recorded as the appreciation of state-owned capital when the rates of value-sustained and value-added state-owned assets were calculated.

The move comes after the country's stock markets have recovered from five years in the doldrums to see drastic ups and downs in the past month.

Following a week-long tumble, the equity value of China's Shanghai and Shenzhen stock markets dropped below the 100 billion yuan mark on Friday to 98.2 billion yuan.

Professor Jin Jihong, an expert on fiscal financing at the People's University of China, said the stipulations would force financial firms to focus on "concrete growth" rather than flimsy equity value hikes.

Zhang Wenkui, deputy director of the Enterprise Department of Development and Research Center of State Council, said financial managers should pay more attention to corporate governance and tangible profits in order to preserve state-owned capital and enlarge the capital surplus.

The government introduced the rates of value-sustained and value-added state-owned assets in 1995 to evaluate the management of state-owned enterprises (SOE) in preserving state-owned capital.

The annual evaluation by the State-owned Assets Supervision and Administration Commission involves four grades from A to D in descending order, with C representing a "pass". SOE managers' salaries and bonuses are closely related to their grading.

The regulations say capital increases will be excluded as gains if they result from assets evaluations for shareholding reforms or market listing, or if they stem from changes in accounting rules.

Meanwhile, capital losses attributed to non-profitable expenditure required by the government, adjustments of accounting rules and other forces such as natural disasters must be included in the calculation.

The regulations identify indices applying to all financial firms, including the net asset value per share, profit growth rate, rate of return on common stockholders' equity and non-performing debt rate.

The government will pay special attention to the capital adequacy ratio of banks and the solvency capability of insurance companies.

(Xinhua News Agency February 8, 2007)