In a jointly issued communique by the Ministry of Finance and the State Administration for Taxation, it was revealed that the State Council, China's Cabinet, approved the tax exemption on securities trade gains by QFIIs in a notice dated December 1.

The QFII regime allows foreign institutions to invest in a certain amount of class A stocks and bonds listed on domestic exchanges, and analysts have interpreted the move as an attempt by the government to encourage more institutional investors into the Chinese stock market, which has fallen by more than 12% this year and is in the midst of a four-year downturn.

However, while the decision is likely to be welcomed by foreign investors, the government has not given a commitment as to when the tax exemption will be put in place, and the markets, expecting more radical measures, gave a downbeat response to the announcement. The Shanghai Index had fallen by 0.7% by midday in Tuesday's trading session on the back of the news.

At the end of September this year, 26 institutions had been approved to invest $4.05 billion under the QFII regime, and Beijing is planning to more than double the current investment quota for foreign firms to $10 billion.