Officials believe the move will attract overseas investors, resulting in an influx of overseas money into the stock market.

Japanese stock house Nomura Securities Ltd and Switzerland's investment bank, UBS AG, were the first foreign investors to be granted QFII status by the China Securities Regulatory Commission (CSRC).

The move also brings China a step closer to integration with global financial markets. It also deepens the reform and opening-up of China's financial markets.

Prior to the move, foreign investors had only been allowed to trade in the dollar-denominated B-share market.

The B-share market makes up a fraction of the traded securities on the Shanghai and Shenzhen stock exchanges.

Yang Kai, chief representative of UBS Warburg's Beijing office, said the company is preparing to flood US$200-400 million into the market.

Nomura Securities said it is ready to put US$50 million into the A-share market, where about 1,200 companies are listed and traded.

The news spurred renewed confidence in China's stock markets.

The Shanghai composite index rose from 1,560 points last Monday to 1,576 points on Friday.

Some of the listed companies likely to be popular with foreign investors - including auto, high-tech, infrastructure facilities and the banking sectors - showed signs of growth.

Experts believe the QFII programme will boost mergers and acquisitions involving China's domestically listed firms, and will increase the participation of foreign investors and advisers in this market.

But the two firms will not be alone for long.

Citigroup, one of the world's largest financial services companies, with 200 million customer accounts in more than 100 countries, will become the first QFII custodian in China - for both UBS and Nomura Securities.

Richard Ernesti, regional head of securities services for Citigroup Global Transaction Services in Asia, said: "We will continue working with the State Administration of Foreign Exchange (SAFE) on their investment quotas and foreign exchange licences required for QFIIs' investments."

According to the regulations, UBS and Nomura Securities have to change their money into tradable local currency before they can make investments in either the Shanghai or Shenzhen markets.

Also, the firms' profits can be changed back into foreign currency and sent back to their home offices.

Citigroup's operations, systems, client services and products in China are ready to serve QFII clients, Ernesti said.

"The QFII measures mark another significant step in the opening of China's markets to increased foreign participation," said Richard Stanley, a Citigroup official in China.

"We look forward to playing an important role in the development of this activity."

Citigroup is one of nine commercial banks - six domestic and three foreign banks - approved by the central bank to act as a custodian bank. The deal has been called an important victory for Citigroup.

Officials from the eight other custodian banks could not be reached for comment.

Experts believe Citigroup's expertise and sound record were key to its selection as a custodian bank.

Citigroup Global Transaction Services' custody business arm in China has been top-rated for five years.

In addition to assisting foreign investors in their applications for QFII licences, Citigroup provides a range of services to QFIIs - including applications for, and opening of, securities accounts and renminbi settlement accounts with the relevant authorities, transaction settlements of cash and securities, confirmation of trades and safekeeping of securities.

Citigroup could also provide services such as informing QFIIs of corporate actions, QFII reporting, receiving dividend payments, regulatory reporting and inward remittances of investment quotas and outward remittances of gains and principal amounts and related cash management.

Citigroup, as a custodian, will act as the primary communication channel between QFIIs and Chinese authorities, Ernesti said.

"In the QFII licence application process, we work with the CSRC and SAFE to clarify each client's qualifications and documentation requirements," Ernesti said.

Citigroup is currently a custodian for B shares, and one of three clearing banks for the Shenzhen market.

The bank is also a receiver in both the Shanghai and Shenzhen markets of B-share rights issues.

Although the door is open, there will not be a flood of funds into China's fund-strapped stock market, experts said.

"They will be very cautious. What they are going to do will is complete trivial steps in the beginning," said Xie Baisan, an economist with Fudan University.

The foreign investors will help transform the investment philosophy in China, Xie said.

The investors will pay more attention to the firms' fundamentals rather than pondering some inner secrets, he added.

China's stock market, with 40 million-plus investors, has suffered from high speculation during its 11-year history.

Experts warn foreign funds via the QFII scheme might not play a key role in boosting China's stock market, as the amount of funds could be trivial compared with the total market capitalization.

"And they will be somewhat speculative, or they would not be in the market," Xie said.