A-share indices in Shanghai and Shenzhen each fell more than 2 per cent on Friday, while the H-share sub-index - representing mainland companies traded on the Hong Kong stock exchange - gained 1.67 per cent on hopes that Beijing would soon allow mainlanders to buy Hong Kong stocks.

Provisional QFII rules, effective from December 1, limit participation to only the biggest institutions. Each institution must be engaged in managing securities assets worth more than US$10 billion.

Qualified banks must rank among the world's top 100 in terms of asset values while qualified insurance firms must have been in business for more than 30 years.

'We will not see a clear trend of money going to China in the short term. The doors have just opened to foreign investors. A lot of things still need to be resolved before they put money into China,' Tai Fok Securities research head Michael Mak said.

Hong Kong Investment Funds Association chairwoman Lin-Yoke Seetoh said fund houses would in the short term be more comfortable investing in China-related counters in Hong Kong as they met stringent quality controls. But she said China companies would now begin to work towards strong corporate governance to meet the requirements of foreign fund managers to attract investment.

'If the Chinese companies are to attract international funds they should work towards meeting the requirements of the fund managers. I think they are working hard at it,' Ms Seetoh said.

She said foreign fund managers would closely look at corporate governance issues before making investments in mainland companies.

Analysts and fund managers are also concerned about high valuations. A shares trade at an average of 42 times historic earnings, much higher than the about 16 times for Hang Seng Index constituents.

'It doesn't make sense to buy into a more expensive market unless you can identify very good investments that are not available in Hong Kong,' Mr Mak said.

He said most big, high-quality mainland enterprises had listings in Hong Kong, although some also chose to raise funds in the A-share market. It would take time and research for foreign investors to identify A shares of smaller enterprises that had the potential to reform.

Mr Chan estimated there would only be about 30 to 50 stocks that would be seriously considered by institutions because of their quality, transparency and earnings predictability.

QFII remittance rules are also dampening foreign enthusiasm. Participating foreign investors have to deposit their hard-currency funds into special yuan accounts at approved custodian banks. Closed-end China fund management institutions can only remit their principal after three years in instalments of no more than 20 per cent of the total each time and with at least one-month intervals between transfers. Other institutions will have a one-year lock-up period before they can remit their principal in instalments of no more than 20 per cent of the total and at intervals of three months or more.

JF Funds spokesman Daniel Chui said: 'Overseas mutual funds like ourselves cannot simply go out tomorrow and start buying A shares. We would have to satisfy the Chinese regulatory requirements and set up a closed-end [yuan]-denominated QFII fund, which possibly [our mainland arm] and our other China funds could then buy into. There would be also considerable valuation and liquidity problems to consider.

'In the short term we will not expect to see massive portfolio inflows into A shares. But does QFII matter to us? Yes, it is a huge long-term positive thing.'

Analysts expect big global companies to view the scheme as an opportunity to gain a foothold in China's investment management and securities industries through strategic investments. But the rules stipulate that each foreign institution must accumulate no more than a 10 per cent stake in a single company, and the total permitted foreign stake in any company must not exceed 20 per cent.

Mr Chan said firms that ultimately hoped to manage pension funds for the country's 1.3 billion people could also view strategic investments as a way of demonstrating a track record and proven behaviour further ahead.

Some fund managers say the qualified domestic institutional investors (QDII) scheme will be the next to gain approval from regulators.

QDII and QFII have often been mentioned in the same breath as steps to liberalising the mainland's capital account without full yuan convertibility.