The development, if it happens, would be embraced by international institutional investors, which continually lobby Beijing for access to the country's growing private equity industry and do not want to risk their cash with global buyout funds whose attempts to buy stakes in mainland firms have been heavily curtailed.

Private equity firms raise money from pension funds and private investors, spend it on stakes in companies whose fortunes they believe they can improve, then try to sell the stakes years later for a profit.

The government is encouraging the development of domestic private equity funds that only invest in yuan. This is an attempt to create rivals for the foreign buyout houses and keep gains from buying and selling Chinese companies inside the country.

Foreign private equity investment is a political hot potato on the mainland. So far this year, according to Dealogic, international buyout houses have spent only US$973 million among them on stakes in Chinese companies.

Last year, Beijing blocked US fund Carlyle Group's attempt to buy tractor parts maker Xugong on the grounds that the little-known engineering firm was strategically important to the country.

'We are trying to persuade the central government to use QFII for people to invest directly into yuan-denominated domestic private equity funds, and to legislate that these funds are still treated as local funds,' Yan said yesterday at a conference in Hong Kong.

'I am confident this change will happen,' he added, but said he could not provide a timetable or forecast how much foreign cash the move could bring into China.

A US money manager at the conference said: 'This would be great. Western economies are not growing as fast as China, and we find it difficult to understand all the different laws and regulations governing what the global buyout funds we invest in around the world can do in China.'

Yan said allowing foreign money managers to put cash directly into Chinese-controlled, yuan-denominated funds 'would solve a host of problems'.

The head of a Beijing-based buyout fund said Yan's idea could work if foreign investors were comfortable with keeping their investment gains from Chinese buyout funds in yuan.

'But they will scratch their heads about this issue of getting the money out,' he said.

Beijing restricts foreign investment in sensitive industries, including media, banking and branded consumer goods. The government banned Coca-Cola from buying a large stake in drinks company China Huiyuan Juice Group in March.

Easing restriction

Buyout operator is confident that the QFII scheme will be extended

Stakes bought by foreign buyout houses in Chinese companies this year, in US$: $973m