(Agencies)
Updated: 2007-11-28 15:13

Top manufacturer China could also become the world's main supplier of capital as it rolls out financial market reforms that could free up billions of dollars in savings for investment, a panel of experts said on Tuesday.

But while the reforms try to address long-standing barriers to capital market development in the world's fastest growing major economy, they could lack teeth if poorly implemented.

"We have so far seen China as a manufacturer of cheap goods, in future it may be seen as a major supplier of capital," Stuart Leckie, senior advisor at Britain's index provider FTSE Group, said at the launch of a report on China's capital market.

Leckie said he expects the Shanghai stock market, the largest in Asia outside Japan, to start attracting listings of foreign companies as it becomes more driven by institutional investors and less by individuals.

China's main stock index has more than doubled so far this year in a bull run stoked by profit growth by Chinese firms in the January-September period.

As a result, the Shanghai Stock Exchange has become the world's sixth-largest bourse by capitalization.

The increased presence of institutions in stock markets was also being driven by the Qualified Foreign Institutional Investor (QFII) program, the report titled "The Rise of China's Capital Markets" said.

The report, published by accounting firm KPMG, in association with Xinhua Finance, FTSE Group and Fitch Ratings, predicted the quota for the scheme, which allows selected foreign institutions to invest in Chinese securities, would be raised to US$30 billion by the end of this year from US$10 billion.

The country's regulators were also trying to reform the bond market which had taken a back seat to its stock markets in terms of activity, the panel said. But more needed to be done as there were problems of multiplicity both in supervision and trading.

The domestic bond market is split into the interbank market and the stock exchanges in Shanghai and Shenzen, and overseen by three regulatory bodies -- the China Securities Regulatory Commission, People's Bank of China and the National Development and Reform Commission.

"China needs a unified trading platform -- either banks should be allowed to trade on stock markets or the new rules have to apply to the interbank market," said James McCormack, head of Asia sovereign ratings at Fitch Ratings.

He said bond market development also depended on the implementation of the newly enacted Enterprise Bankruptcy law.

But the bond market was overwhelmed by treasury bonds which accounted for 72.4 percent of the issuance in the first half of 2007 and that the corporate sector lagged, the report said.

The dominance of short tenor bonds also meant the lack of a genuine yield curve as the long end remained spotty.

The small corporate bond market had also resulted in companies turning for their financing to the banking sector which was unable to provide long-term funding.

"That burdens the nation's corporations with interest rate risk as well as liquidity concerns, resulting in less competition for banks," the report said.