People's Bank of China, the nation's central bank, has approved three Qualified Foreign Institutional Investor (QFII) custodians: the Industrial and Commercial Bank of China, Agricultural Bank of China, and Bank of China, Securities Daily reported.

The other four banks who have also submitted applications for custodianship -- Bank of Communications, Hongkong and Shanghai Bank, Standard Chartered and City Bank -- are still waiting for approval.

But central bank's approval does not mean these banks can immediately carry out QFII business, for it still needs nod from China Securities Regulatory Commission and State Administration of Foreign Exchange.

Sources with securities watchdog say that the applications are under scrutiny, and final result will be released in several days.

According to the procedures, an overseas institution can begin QFII operation through custodians once the custodianship was approved. Central bank's approval means a step closer for foreign investors to entering China's securities market.

Experts say that increasing QFII operations can strengthen the supply of long- and medium-term capital, boost investors' confidence, and enhance the international influence of China's securities market as well.

It also helps strengthen the team of institutional investors, improve the performance of listed companies, adjust market structure, improve investment notion, and promote the formation of stock culture in capital market.

China formally introduced the long-awaited QFII scheme on December 1, 2002. The scheme enables qualified foreign investors to invest in A shares listed in Shanghai and Shenzhen, treasury and corporate bonds and other financial instruments.

However, there are still lots of restrictions. First, foreign investors have to set up a special Renminbi account in a custodian bank, and use domestic securities companies for trading.

Second, applicants have to submit lots of documents, including accounting reports, operational procedures, risk and returns assessments, risk control measures, commitment for medium and long-term investment.

Last, each licensed foreign investor can only acquire up to 10 percent of stocks in a domestic listed firm. Every investment has to be in line with the guidelines set by the government over the ratio of foreign investment in different industries.

Economists say that it is only a transitional measure before the Renminbi becomes fully convertible under the capital account and such restrictions will be gradually loosened.

(china.org.cn by Tang Fuchun, January 9, 2003)