China should let insurance companies invest more money directly in shares to help develop the stock market, Shanghai Stock Exchange President Zhu Congjiu said.

"China should expand direct stock investments by insurance companies," Zhu said in a speech to a financial conference in Shanghai today, without giving figures. "Development of institutional investors is crucial to China's stock markets."

Letting institutions such as insurers invest more in equities may help China's $488 billion stock markets sustain a rally from eight-year lows reached last year. Insurers are restricted to investing no more than 5 percent of their assets in local-currency A shares under current rules.

Stock investment this year by China's insurance companies jumped 186 percent to 40.2 billion yuan ($5.03 billion) as of the end of June, the official Shanghai Securities News reported on Aug. 15. The government plans to double the percentage insurers can invest in equities, the report said, citing unidentified people.

The Shanghai Composite Index, which tracks the bigger of China's two stock markets, has surged 71 percent from its July 2005 low, while the Shenzhen Composite Index has jumped 73 percent.

The Shanghai index slipped 0.5 percent to 1726.71 at 10:37 a.m. this morning, on course for its first decline in five days, while the Shenzhen benchmark fell 0.3 percent to 428.57.

State Shares

China's stock markets rallied after the government suspended new share sales in May last year and initiated a program to convert more than $250 billion of non-tradable, mostly state-owned shares into stock that can be bought and sold on exchanges.

The overhang of non-tradable shares, accounting for about two-thirds of the total, contributed to a market slump that shaved more than half off the Shanghai composite's market value in the four years between 2001 and July last year.

Companies accounting for 93 percent of China's stock market capitalization have now carried out conversion of their non- tradable shares, Xie Geng, director general of the market supervision department at the China Securities Regulatory Commission, said at a conference in Beijing today.

Only 185 out of China's more than 1,400 listed companies have yet to start their share-conversion programs, Xie said. Under the government-directed plan, holders of a company's tradable shares have to agree to the change. Companies and major shareholders have been offering cash, shares and other incentives to compensate minority holders for the increase in supply of tradable shares.

Overseas Investors

China should also expand the amount of money overseas institutions are allowed to invest in A shares, Fang Xinghai, deputy director of the Shanghai government's financial services office, said at the Shanghai forum.

The government so far has allowed 48 institutions such as Morgan Stanley, Goldman Sachs Group Inc. and UBS AG to invest a combined $7.8 billion in local-currency shares and bonds under a so-called qualified foreign institutional investor, or QFII, program.

The Shanghai exchange's market capitalization will rise to more than 5 trillion yuan after Industrial & Commercial Bank of China's initial public offering later this year, Fang said. Shanghai's current market capitalization is 3.8 trillion yuan, according to Bloomberg data.

The government is encouraging bigger and better-quality companies to sell shares while increasing the influence of institutional investors in an effort to make China's stock market less speculative and more representative of the world's fastest- growing major economy.

Beijing-based Industrial Bank, the nation's biggest lender, plans to raise as much as $7 billion selling shares in Shanghai and $14 billion in Hong Kong in a world-record IPO, people involved in the sale said earlier.

Institutional investors hold stocks equal to 30 percent of the market value of tradable shares, China Securities Regulatory Commission Chairman Shang Fulin said in a speech to today's forum.