China said on May 26 it had approved two foreign firms - UBS AG and Nomura Securities, a unit of Nomura Holdings Inc - to trade domestic shares under the landmark qualified foreign institutional investor (QFII) scheme.

Two weeks later, regulators announced Morgan Stanley and an arm of Citigroup were approved to invest under the QFII scheme.

China's yuan-denominated A-share market - capitalized at more than US$500 billion and rivalling Hong Kong as Asia's second-biggest - had been closed to foreigners until the launch of the QFII scheme in late 2002.

Following are the highlights of the QFII scheme:

Investment products

The new rules open up various products to foreign investors:

More than 1,200 companies which have listed A shares;

Treasury bonds, convertible bonds and corporate bonds;

Initial public offerings, rights and additional share issues; and

Other products approved by the China Securities Regulatory Commission (CSRC).

Rules

Closed-end China fund managers cannot withdraw their money from the country for three years after their initial investments;

Other qualified investors cannot withdraw their money from China for one year after their initial investments;

A foreign investor cannot hold more than 10 per cent of the shares in a listed company;

Foreign shareholding in a listed company cannot exceed 20 per cent; and

Managers of pension funds, insurance funds, mutual funds and closed-end China funds with a strong track record will be preferred for their benefit to the market's long-term growth.

Investors

The market's watchdog outlined rules for the different applicants:

Fund managers must have been in business for five years and have managed US$10 billion in assets in the last financial year;

Insurance companies must have been in business for more than 30 years, have at least US$1 billion in paid-in capital and have managed US$10 billion in securities assets in the last financial year;

Securities houses must have operated for more than 30 years, have paid-in capital of at least US$1 billion and have managed US$10 billion in securities assets in the last financial year; and

Commercial banks must be in the world's top 100, in terms of global assets, and have managed US$10 billion in securities assets in the last financial year.

Trust firms and government-invested institutions can also apply, although it is unclear what criteria they must meet.

The CSRC said in March it will examine foreign investors annually. Those investors who fail to meet the criteria will be ordered to quit the markets.

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