Shanghai's hard-currency B-share index dropped 3.56 percent to 114.528 points, while Shenzhen's fell 1.95 percent to 191.05.

Foreign funds, insurance companies and brokerages, allowed to apply for qualified foreign institutional investor (QFII) status since yesterday, said China's sheltered markets remained murky and overpriced and so foreign investors were likely stay away until that changed.

"We're still studying it, and the major reason is the same old issue, which is basically valuations," said Norman Ho, fund manager at Value Partners based in Hong Kong.

"Some of (the shares) are not that expensive, but they're still not as cheap as the ones we're buying in Hong Kong," Ho said.

Local punters - the main force in China's US$500 billion domestic A-share markets - appeared to share some of those sentiments and pushed the Shanghai A-share index down 2.67 percent yesterday.

The shares had rallied off 10-month lows late last week and wary investors cashed in their chips.

"More punters began to sell shares in the afternoon after they saw the downturn in the morning session," Zhejiang Securities analyst Wu Jiang said.

"The market is trying to test last week's intraday low of 1,353 points to see whether the bottom has been hit."

Punters also worried that institutional investors were selling shares in the last month of the year to raise cash and make their end-of-year portfolios appear in better shape.

"Institutional investors usually need abundant cash to dress up their books. So (punters) are very cautious about selecting stocks and usually sell shares to take a profit very quickly at the end of the year," said Great Wall Securities analyst Zhang Yong.

Software designer UFsoft, last week's star performer, was the biggest A-share decliner in Shanghai, dropping 8.3 percent to 54.99 yuan (US$6.64).

Analysts, investors and traders agree that China's 11-year-old stock markets, despite their tantalizing size, are rife with problems such as poor corporate reporting, a murky regulatory environment and rampant speculation.

This is partly why China's key indices have fallen about 10 percent since the landmark reform was announced on November 7.

"The start of the QFII scheme - a move that will benefit the market in the long term - is not likely to have an impact soon because foreign funds can enter the A-share market no earlier than next year, after applications are approved," said Haitong Securities analyst Zhang Qi.

The benchmark Shanghai composite index, grouping both A and B shares, was down 2.68 percent at 1,395.675 points.

Turnover on the B-share market was US$14.179 million in Shanghai and HK$48.349 million (US$6.2 million) in Shenzhen.

The turnover of yuan-denominated A shares on Monday was 5.5 billion yuan (US$664.5 million) in Shanghai and 2.8 billion yuan (US$338 million) in Shenzhen.

"Obviously, investors sold more shares today to take profits, and they started to worry about a downturn again," said Huatai Securities analyst Wang Xiaojun.

"The QFII scheme seems unlikely to introduce a huge amount of money into the A-share market in the near term but it will introduce different investment principles, which will influence the market in the long term," he added.

(China Daily December 3, 2002)