A man gazes at a screen showing stock quotes in a Shenyin & Wanguo Securities outlet in Shanghai. Shares have sunk 34 percent since June 2001. --Gao Feng

The effort to attract foreign investors to China's A-share stock market has been a long and difficult courtship. But with the rules now in place, the current climate finds many prospective suitors in no rush to take the ceremonial plunge, as Zhang Shidong reports.

China's A-share stock market can expect a greater inflow of foreign capital this year as measures taken by the government last year to attract investment are now implemented.

The qualified foreign institutional investor (QFII) system, unveiled jointly by the China Securities Regulatory Commission and the People's Bank of China in November, lifted the ban on select foreign investors to trade on the country's yuan-denominated A-share stock market.

Under the new rules, qualified overseas banks or funds will be allowed to exchange a certain amount of hard currencies into yuan and trade in Class- A shares.

Foreign investors are currently allowed to trade hard-currency B shares with tradable market capitalization of US$1 billion, an amount significantly dwarfed by listed A-share market worth US$160 billion.

The incentives, however, held few cheers for the market as analysts say the lukewarm response from foreign funds still has a murky outlook.

While the media is beating the drum to what changes QFII is expected to bring to China's nascent market - hopefully better corporate governance and a rational investment concept based on the corporate earnings potentials - at present, only one foreign institution has been vocal in their interest though more than 10 have filed applications.

For foreign investors, even if they were to get a license from the Chinese government, it's doubtful if any would immediately rush to include Chinese stocks in their global equities portfolios, according to market observers.

In Shanghai Daily's contact with the major global investment banks, including Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers, all were tight-lipped about buying into Class-A shares.

To date, only UBS Warburg was taking a high-profile approach.

"As a global investment bank which manages funds of more than US$150 billion, UBS Warburg will definitely apply to buy into Chinese A shares," said Yang Kai, UBS's chief representative in China. "We plan to be among the first batch of overseas investors in the A-share market."

Colleague Joe Zhang, the bank's head of China research, said the company had found dozens of rough diamond stocks on the market, though he declined to name them.

Currently, more than 10 investment institutions from the U.S., Europe and Hong Kong have submitted applications, according to a report in the International Finance News, citing an unidentified source from the Shanghai Stock Exchange.

Fred Hu, head of Goldman Sachs' China economic and strategy unit, said the QFIIs would trickle in rather than bring a sea change on the Chinese stock market for the short term.

"It will take three to five years for foreign participants to account for 10 percent to 15 percent of the market,'' he said.

"Otherwise, I will be very surprised," he added.

Gui Haoming, a Shanghai Shenyin & Wanguo Securities & Consulting senior analyst, said the priority for foreign investors at this stage is to get the license from the securities regulator, not to draw out an immediate plan to throw capital into the market.

"What the QFIIs will do first is to get themselves in with the local market before taking any real action. You will not see a copycat of the Western investment mode on the Chinese market," he said.

"The QFII is not likely to exert too much of its inputs on the Chinese stock market for the short term."

Apart from unfamiliarity with the market what looks unappealing to foreign investors is the current prices of the Chinese stocks.

The 1,000-plus companies that now list Class-A shares on the Shanghai and Shenzhen stock markets trade at nearly 36 times the average earnings, compared with the price-to-earnings ratio of 15 to 20 that is preferred by foreign fund managers.

In addition, most of China's flagship companies, such as Sinopec or China Unicom, are already available to foreign investors on the Hong Kong and New York stock markets, where their share prices are cheaper than the Class-A shares at home. However, a recent survey jointly conducted by Securities Times newspaper and Orient Securities Co showed that what most concerns foreign investors is poor corporate disclosure among China's public companies.

Twenty percent of the respondents thought Chinese companies had slack corporate governance.

So what will the foreigners invest in? There are still 60 Class-A stocks that would draw attentions, said UBS's Zhang.

Without identifying any, he classified the stocks into four categories:

￥ Companies enjoying a monopoly over an industry, such as airports and expressways.

￥ Companies which have built up a solid brand name.

￥ Companies that are related to the resource, such as mining and tourism.

￥ Companies that manufacture domestic goods, such as liquor and textiles.

"Besides earnings and growth potential, corporate governance, the reliability of the financial statements and the business ethics of the management will also be taken into account," Zhang said.

Although, technically speaking, the QFII rules have been in effect since last month, the securities regulatory commission has not given approval to any foreign investor at this stage.

It is not that the government is reluctant to distribute licenses.

The rules for the QFII stipulate that foreign investors should apply through custodian banks.

To date, five Chinese commercial banks - the Industrial and Com-mercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank and the Bank of Communications - have already been appointed by the central bank as the first batch of QFII custodians.

In the latest development, three overseas banks, HSBC, Standard Chartered and Citibank, last week followed to be licensed for custodian service.

However, the appointment of the banks has yet to be reviewed by the securities regulatory body, one of the twin regulators for the QFII.

Even from an optimistic point of view, foreign institutions are not likely to come into being until the end of the month, industrial officials believe.

However, James Liu, executive vice president of the Shanghai Stock Exchange, said during an interview in Singapore earlier this month that the first qualified foreign institutional investor is likely to be granted a license in March or April this year.