When China's chief legislator Li Peng said two weeks ago Beijing had no immediate plans to open the mainlanders-only A-share market to foreigners, it was not exactly a big disappointment to the queue of fund management companies pounding on its doors. Those doing business with the mainland are familiar with Beijing's gradualist approach to financial liberalisation, where the route from initial expression of interest to concrete action could take years. Four years have passed since talk of allowing foreign investors into the A-share market was broached. The financial crisis which has savaged much of Asia has convinced Beijing of the need to be cautious towards short-term portfolio flows, whose sudden cross-border movements could destabilise the financial system. Yet it also is becoming increasingly clear that Beijing cannot delay much longer the introduction of reputable foreign fund managers to launch a pilot scheme on Sino-foreign mutual funds to invest in A shares. 'The destabilising impact of the Asian financial crisis has made Beijing cautious, but I hope some concessions will be made next year,' said Asia Asset Management publisher Tan Lee Hock. Analysts said unless Beijing nurtured a strong institutional base, its volatile and illiquid stock markets - now seen by Beijing as a viable alternative fund source for the corporate sector - could become an impediment to reforms of the decaying state industrial system. Foreign fund managers are teaming up with mainland partners to prepare for the day the doors are open on an experimental basis. They include American International Group, Salomon Brothers, Dresdner Bank, and Templeton. 'There is a serious shortage of trained local expertise - actuarial consultants - to develop a broad base of institutional investors needed to stabilise and build on the growth of the securities markets,' Mr Tan said. In the eight years since their launch, the Shanghai and the Shenzhen stock markets have not been able to shed their casino image - thanks to an essentially immature retail investor base. Rampant speculation and the drive for short-term profits among its 40 million investors has been unable to provide a steady source of funds for the long list of companies rushing to go public, as state banks stop making policy loans to the state sector. The advantages of a robust institutional base that would promote state-sector reforms and efficient resource allocation are obvious. Contractual savings institutions, such as life insurance companies and pension funds, help to mobilise long-term funds for long-term capital market investment, while short-term funds are mostly handled by mutual funds. Together, they help create an effective demand for marketable securities, making the capital market more stable and liquid which, in turn, helps make funds more accessible to those in need of cash. By virtue of their size, professional fund managers can put pressure on companies to improve transparency and disclosure standards, which among listed companies remain hopelessly inadequate. 'The mainland does not have the range of institutions to widen its capital market,' Templeton Franklin Investment Services (Asia) marketing and sales director Stewart Aldcroft said. Analysts said feedback from Beijing suggested it appreciated the role of foreign institutional investors can play to help an economy in transition, particularly from the transfer of expertise and technology. Government leaders now are considering appropriate measures to safeguard against potentially destabilising effects from their entry into the domestic financial system. Beijing restricts investment by institutional investors to treasury bonds and bank deposits. Stock investment is out, except for five state-approved mutual funds set up this year, which marked the primitive beginnings of a mainland mutual-fund industry. Analysts said the mainland industry had a long way to go to catch up with global markets, not only of developed countries but also of emerging ones. There are about 5,800 mutual funds in the United States, exceeding the number of listed stocks on the main board. In Hong Kong there are about 1,600 authorised mutual funds. Worldwide, there are as many mutual funds as there are listed stocks, about 35,000. The five Beijing-approved mutual funds launched this year are close-end, 15-year funds with a combined capitalisation of about 10 billion yuan - representing a fraction of the 917 listed A- and B-share stocks in Shanghai and Shenzhen stock exchanges. 'That is disproportionately small,' Mr Aldcroft said. However, need is certain to foster further expansion. The mainland's need for investment vehicles is underscored by its growing institutional base, particularly in the rapidly expanding insurance sector, which now includes nine foreign firms. Insurance-premium income is expected to reach 100 billion yuan for the first time this year, and exceed 300 billion yuan in 2000, half of that coming from life insurance premiums. By 2010, premium income is expected to reach 600 billion to 700 billion yuan, of which 350 billion to 400 billion yuan would come from life insurance. It comes as no surprise that insurers are looking for better investment avenues to improve returns; and they are better positioned than pension funds to contribute investible funds to capital markets. That is not to say mainland pension funds may not, one day, play an important role. Although arguably less developed, China's pension assets could reach 15 trillion yuan by 2030, by World Bank estimates. A greying population makes it increasingly urgent for Beijing to explore cost-effective and reliable ways to support its elderly. As it reforms its pay-as-you-go system to a multi-pillar one, the efficient management of pension-fund assets through the capital markets will take on new significance. And the need to introduce foreign expertise to help nurture a solid institutional base will become much more urgent.