Stock market regulators will move to relax and clarify rules over the coming months to attract more foreign portfolio investors to the country��s languishing stock markets, the South China Morning Post reported, citing sources.

According to the Hong Kong- based paper, dismal market sentiment among domestic investors, combined with record foreign currency reserves that reduce the risk of capital flight, have prompted mainland regulators to make it easier for qualified foreign institutional investors (QFIIs) to invest.

Changes in the pipeline include a shortened capital lock-up period and the removal of restrictions on QFIIs to open sub-accounts for clients without a QFII licence.

QFIIs may be able to use several mainland brokerages to trade securities, and a much-needed clarification on tax liabilities for QFIIs may also be on the way. Details are expected to be announced in the first quarter, well before the two-year anniversary of the first yuan-securities trading by QFIIs in July.

Since July 2002, investment quotas totallingUS$3.4 billion have been granted to 24 foreign institutions to trade A shares and other yuan-based securities under the QFII scheme.

Under existing rules, most QFIIs can begin repatriating the investment principal they have put into the scheme after one year. The lock-up period lasts for three years for closed-end funds.

Regulators might lift a requirement that QFIIs repatriate investment principal only once every quarter after a one-year lock-in period, and that no more than 20 percent of the investment principal could be repatriated at one time, sources told the paper.

The biggest unresolved issue affecting QFIIs might be taxes, where policy uncertainty frustrated investors, making it difficult to comply with requirements for annual reports.

Detailed taxation guidelines are now being worked out by various government departments and might be issued within the next couple of months.

Regulators are expected to grant QFIIs the same tax treatment domestic fund managers receive. Stamp duties will be imposed on QFIIs and, like domestic investors, they will not be exempt from capital gains taxes, according to the report.

Although authorities are unlikely to lower the minimum US$50 million investment rule, they might soon allow QFIIs to open sub-accounts for their clients at the securities depository, sources say.

Source: Shenzhen Daily-Agencies