Foreign strategic investors are now allowed to buy China's tradable A-shares in addition to buying through the incumbent Qualified Foreign Institutional Investors (QFIIs) system, according to a joint announcement issued late last Friday by the Ministry of Commerce and China Securities Regulatory Commission (CSRC).

The new rule, which became effective immediately after the announcement, requires foreign investors to hold a certain percentage of A shares within a certain lock-up period, meaning that they must keep the shares for a limited period of time.

By contrast, there is no lock-up time for buying shares through QFIIs, though the CSRC imposes quotas on the amount of shares available for purchase. The announcement said the two authorities would work out details for this new issue method shortly.

China's stock market is now engaged in a fundamental structure reform to convert two-thirds of its State-owned non-tradable shares to tradable ones.

This share separation was blamed for the four-year market sluggishness that resulted in distorting the price mechanism since the two types of share were offered at differing prices.

Approximately 186 domestically listed companies, whose shares account for about 20 per cent of the market value, have undergone or are currently undergoing reform.

When converting non-tradable shares to tradable ones, the controlling shareholders must ensure they do not float their shares within a certain time period and thus must sell them bit-by-bit in the future.

This rule was enforced to prevent a flood in the market and investor anxiety.

Even with the application of lock-up promises, the newly-floated former non-tradable shares are expected to reach about 200 billion yuan (US$25 billion) next year, much higher than the initial public offerings in a single year in China, said Dong Chen, a research department manager at CITIC Jianyin Securities.

Although the government was trying to encourage more money to be invested on the stock market, some domestic institutions and retail investors were still being conservative.

By contrast, foreign strategic investors, who were inspired by China's rapid economic growth with interest in long-term returns as opposed to short-term gains, showed much interest on China's stock market, according to the manager.

Providing more chances for foreign investors to invest in China's equity market will enrich the capital sources and help boost the market, he said.

However, the manager also pointed out that foreign investment alone would not cure the market ailment and more domestic money was needed.

The regulator has allowed insurance money and pension capital to be invested on the stock market and has expanded the QFII quota by US$6 billion this year.

The added quota almost equalled 5.6 per cent of China's market flotation value of 900 billion yuan (US$111 billion).

Moreover, China has 12 trillion yuan (US$1.48 trillion) resident bank savings and 8 trillion (US$988 billion) corporation savings, which is far more than the total market value of the stock market, said Tao Dong, chief regional economist of Credit Suisse First Boston.

"What the domestic market lacks is not capital, but confidence," he said.

The new rule released last Friday also said that when a listed company with foreign stakes joined the share reform, the company can still enjoy favourable policies as a "foreign-invested enterprise" as long as foreign investors keep at least 10 per cent of the company's stakes after selling its former non-tradable shares.

(China Daily 11/08/2005 page11)