Beijing has approved guidelines allowing foreign-funded firms to sell shares to domestic investors in China. The move clears the way for companies including HSBC, Unilever and Bank of East Asia to tap the mainland's markets, where shares generally attract a higher valuation. Yesterday's guidelines followed Beijing's endorsement in July of such firms' domestic listings. They came in a document issued by the China Securities Regulatory Commission and the Ministry of Foreign Trade and Economic Co-operation (Moftec), and were published yesterday in the China Securities newspaper. They establish the legal basis for foreign-funded joint-stock companies in operation for more than three years to seek a listing on either the domestic yuan-denominated A-share or foreign currency-denominated B-share markets. Once listed, the foreign investors must retain a minimum stake of 10 per cent. The document and Moftec officials also suggested the listed vehicles might lose their preferential treatments such as tax benefits as foreign-funded firms if foreign holdings were diluted below 25 per cent. The move to allow listing by foreign-funded firms has been seen as both an attempt to improve the quality of companies listed on the Shanghai and Shenzhen exchanges and further reform of the country's financial industry ahead of World Trade Organisation entry. It could lead to a race among foreign-funded companies, seeing such listings as a means to improve local brand recognition, to be the first to take advantage of the new opening. China had approved 382,930 foreign-funded enterprises by the end of September. A few of them are believed to already have stakes in listed companies, usually as pilot programmes. Chinese officials have seen an increasing number of foreign-funded firms applying for conversion into joint stock companies - now accounting for about 5 per cent of foreign-invested firms in China - since the proposal was first floated in July. A spokesman for the China operation of Unilever yesterday said the company would study the document carefully. Unilever has long indicated its interest in raising funds on the domestic stock markets as part of the firm's overall aim of localising its business. It also hopes to lure more local talent with stock options after a domestic listing. The Bank of East Asia, HSBC Holdings, insurer American International Group, French telecommunications equipment maker Alcatel and United States camera maker Eastman Kodak also reportedly harbour such plans. The new guidelines have, however, been dismissed by some observers as ambiguous in places. 'It does not appear to say anything about the notion of secondary offerings by foreign investors. Whether, say, you could do a secondary offering and drive your investment below 25 per cent,' said a Shanghai-based US lawyer. Legal experts see such offerings as a possible means for foreign investors to pull funds out of China. China's legal framework encourages foreign investment in the country, but leaves extraction a thorny issue. A Moftec official said the new rules would not lead to a massive outflow of foreign capital invested from China, as existing holdings of foreign partners in the ventures would remain non-tradeable after the listings. The rule, the American lawyer said, did seem to plug a regulatory loophole permitting foreign investors to acquire illicitly non-tradeable legal person shares - usually owned by institutional investors - in mainland firms. While foreign investors are not allowed to buy non-tradeable shares, some have attempted it through front companies in China. The guidelines forbid foreign investment companies from buying non-tradeable shares of domestic-listed companies.