Institutional investors held 40 percent of all shares traded in China as of last week.

Tu Guangshao, vice chairman of the China Securities Regulatory Commission, said on Saturday the trend is pleasing.

"The rise of institutional investors is very positive to improve the structure of China's capital markets," Tu said at a press conference in Beijing.

China encourages participation by institutional investors to help reduce volatility in the stockmarket, Bloomberg News reported.

The government will allow the nation's fund managers, social security funds, insurance firms and select overseas investors to increase their holdings, Xinhua news agency reported on December 3, citing CSRC chairman Shang Fulin.

"The stockmarket is healthy in the medium and long term, but in the short term investors are still largely small investors, and they can easily get valuation ahead of itself," Fang Xinghai, deputy director for financial services for Shanghai's municipal government, said in an interview last week.

Overseas investors will play an increasingly important role in China's stockmarket, Tu said.

The government has approved US$9 billion worth of investment from abroad since it opened the A sharemarket to foreign investors in 2003 under the qualified foreign institutional investor program.

Tu declined to comment on the possible merger of foreign-currency B shares with local-currency stocks.

(Shanghai Daily January 15, 2007)