'The policy is good news for a market which has long been sensitive to talks about boosting liquidity,' said Essence Securities analyst Liu Jun. 'It all boils down to the mainland regulators' attitude towards the Taiwan investment.'

The insurers will not be able to buy mainland-listed equities unless they receive approval from Beijing to invest as qualified foreign institutional investors (QFII).

The Taiwanese proposal comes at a time when the mainland is trying to expand its QFII scheme to attract larger fund inflows to the Shanghai and Shenzhen markets.

Yao Gang, a vice-chairman of the China Securities Regulatory Commission, said at the end of June that Beijing was studying a mini-QFII programme under which asset managers would be allowed to issue yuan-denominated funds in Hong Kong, to tap the 80 billion yuan of deposits already in the city.

Analysts said mainland regulators would not be swift in approving Taiwan insurers' investment in A shares.

The mainland's economic growth has attracted increasing interest in companies from foreign investors. To date, 89 foreign institutions have received US$17.72 billion in quotas to buy A shares. The cap is set at US$30 billion.

The Shanghai Composite Index is down 19.5 per cent so far this year amid a liquidity drain since Beijing tightened monetary policies to contain inflation and curb asset bubbles.

'It is difficult to expect a large-sized fund inflow from domestic investors because the government is determined to control inflation this year,' said Dazhong Insurance fund manager Wu Kan.

In the first half of last year, easy credit resulted in 1.2 trillion yuan of funds flooding in as firms invested unused loans in stocks, chasing short-term returns, according to Wei Jianing, a researcher at State Council's Development Research Centre.

Beijing has been cautious about opening its financial markets to foreign investors in the past decade. Early last year, there was speculation that Beijing would grant an additional US$2.8 billion in QFII quotas as a way of stabilising the volatile market. But regulators have yet to implement further liberalisation.

Beijing launched the QFII scheme in 2002 in the belief that powerful overseas institutions could add more professionalism and stability to the domestic equity market.

QFIIs are barred from investing in the mainland's stock-index futures although the regulator is considering allowing them to use as much as 10 per cent of the quotas to play the derivative.

In the money

The policy is seen as good news for a market hit by a need for cash

The amount of quota available to qualified foreign institutional investors for investment in A shares, in US$: $30b