Domestic stock exchanges saw indexes climb yesterday, reflecting the public's increasing confidence in the market as China's securities reforms start to take effect.

The composite stock index on the Shanghai Stock Exchange rose 1.4 per cent yesterday. The Shenzhen composite stock index also climbed 81.53 points from the previous close, making a good start to 2006.

Experts said the government's moves to allow foreign investors to buy strategic stakes in listed companies' tradable shares was a factor.

Encouraging managers of listed companies by rewarding them with bonus shares has also contributed to the public's rising confidence.

These two rules have just been announced by the Chinese Government and aim to draw in large overseas capital and improve listed companies' corporate governance.

Starting from January 31, overseas investors will be allowed to buy exchange-traded A shares, provided they acquire at least a 10 per cent stake and hold the stock for three years.

The rule was introduced by the Ministry of Commerce, the China Securities Regulatory Commission, the State Administration of Taxation, the State Administration of Foreign Exchange and the State Administration for Industry and Commerce.

It is aimed at introducing advanced management expertise and technology.

Foreign companies with at least US$100 million of overseas assets, or no less than US$500 million of overseas assets under management, will be eligible to make such strategic investments.

Under existing rules, foreign investors are permitted to take strategic stakes by buying non-tradable shares, subject to regulatory approval. Non-tradable shares typically change hands at a discount compared to the price of a company's traded shares.

Experts point out the move may boost the number of mergers and acquisitions in China.

The new rule is an addition to a scheme that has allowed 34 overseas institutions to invest a combined US$5.6 billion in local-currency shares.

China's measures to encourage public company managers to better run their firms by rewarding them with bonus shares is also an innovative move.

The measure, released by the China Securities Regulatory Commission, allows directors, supervisors, top-level managers and key technology experts in a listed company to be rewarded with the company's shares if they have contributed to increasing the company's profits.

However, the measure does not apply to independent directors and companies that have previously made false financial statements and conducted illegal activities.

"Only by rewarding managers with bonus shares can they be motivated to run companies better." Lu Xingqian, a senior manager at China Merchants Securities, said.

"Most shares in listed companies in China are State-owned and individual managers, no matter how well they run the companies, cannot own their own shares under the existing rules. Lack of rewards has been a main cause of bad corporate governance," Lu said.

"With the new rules, managers will try their best to create high profits for the companies and for themselves."

China is in the process of converting about US$210 billion of non-tradable shares, mostly State-held equity, into common stock that can be bought and sold on the exchanges.

Over 200 listed companies, accounting for about 30 per cent of China's total market capitalization, have embarked on the programme to convert their non-tradable stockholdings.

The government wants to bring share investment more in line with international practices to make its companies more responsive to market pressure.

The Shanghai and Shenzhen indexes have lost almost half their value since their 2001 peak, partly because of poor corporate governance and corruption scandals.