China's securities watchdog yesterday promised to increase the investment quota for qualified foreign institutional investors (QFIIs) as part of a multi-pronged effort to boost the stock market.

"QFIIs have played an active role in China's stock market," Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said yesterday at a press conference. "We will expand the pilot program and steadily increase the investment quota."

However, he declined to disclose figures for the new quota.

Shang's remarks come among mounting pleas from leading foreign investment banks, such as Merrill Lynch and Deutsche Bank, for an increase in the quota as the US$4 billion set in 2003 has already been used up.

"This shows that foreign investors are very optimistic about China's stock market," said Liu Jipeng, a renowned stock market expert and professor at the Capital University of Economics and Business. "Raising the quota will really stimulate the market."

As well as QFII, more domestic capital will also be encouraged to enter the stock market, said Shang.

A bigger proportion of insurance capital, corporate pension and social security funds will be allowed into the stock market while institutional investors will be fostered.

A key step will be to accelerate the pace of commercial banks launching fund companies.

Earlier this year, Industrial and Commercial Bank of China (ICBC), China Construction Bank and Bank of Communications got the nod to launch fund companies; and Shang said ICBC has already finished the preparatory work for the launch.

To pump more insurance capital into the stock market, the government will also look at the possibility of allowing insurance institutions to set up fund companies.

Shang hinted that more policies favourable to the stock market are to be announced.

"There remains much room for further policy adjustment," he said. "Some policies, for example those announced to curb overheated investment in the stock market, don't suit the current situation."

According to Liu, the policies include those of the early 1990s which forbid State-owned enterprises from speculating in the stock market, stop banks from entering the stock market, and prohibit financial institutions from conducting mixed operations.

Shang stressed that "policies to encourage capital market investment will be enhanced further." With China's stock market languishing, Shang said the government has studied "various measures" to safeguard stock market stability. But he did not confirm the establishment of a buffer fund which has been a hot topic in recent months.

"We must strive to maintain market stability while introducing non-tradable-share reform, which is a significant step in the development of a capital market," he said.

Experts said Shang's remarks demonstrate the central government's determination to make non-tradable-share reform a success.

"This means the buffer fund is under consideration," Liu said. "The government will take necessary measures to ensure the smooth reform of non-tradable shares."

However, Yi Xianrong, a researcher with the Chinese Academy of Social Sciences, said a buffer fund would hardly stabilize the market. Instead, it would only eat up State finances, he warned.

(China Daily June 28, 2005)