The scheme, discussed for years, will formally be introduced on December 1, according to a circular jointly released by the China Securities Regulatory Commission and the People's Bank of China yesterday.

Foreign investors that satisfy designated qualifications will be able to invest in A shares listed in Shanghai and Shenzhen (which are now only open to domestic investors), treasury and corporate bonds and other financial instruments approved by the Chinese authorities, it said.

The move closely follows a first step by the government on Sunday to open up non-tradable State-held and institutional shares.

The two changes, which open up US$500 billion of A shares to foreign investors, will greatly boost investor confidence by infusing fresh and much needed funding into the market, said Xu Hongyuan, a senior researcher at the State Information Centre.

In the long term, the entry of qualified foreign investors will also bring more rational investment sentiment to the bourses and help upgrade the composition of investors.

The circular said foreign investors had to set up a special renminbi account with domestic banks, which will act as custodians for the assets used for investment, and use domestic securities companies while trading.

Also, it only permits each licensed foreign investor to acquire up to 10 per cent of stocks in a domestic listed firm.

All investment will follow the guidelines set by the government over the ratio of foreign investment in different industries.

Certain foreign exchange quotas will be granted for the remittance of capital in and out of China.

"It is only a transitional measure before the renminbi becomes fully convertible under the capital account and such restrictions will be gradually loosened," Xu said.

Yan Xiaoqing, chief representative for Belgium-based Fortis Investment Management in Shanghai, said he was "glad to hear the news" because a more open Chinese stock market has been expected for so long.

According to the circular, a foreign asset management company has to have five years of experience in the sector and have managed at least US$10 billion in assets last fiscal year.

Similar thresholds have also been set for insurers, securities houses and commercial banks, who can all apply for a QFII licence.

Yan said most global investment companies will qualify under the conditions and those with an interest in Asia will be keen to enter the Chinese market.

Xu said Chinese enterprises should also improve their performance to be more appealing to foreign investors.

Under the rules, QFII applicants must submit their investment proposal, accounting reports and commitment for medium and long-term investment.

They also have to be cleared of any major irregularities in their home market over the past three years.

(China Daily November 8, 2002)