News of such a pivotal liberalisation, coming as the US House of Representatives prepares for a key vote on China's trade status this week, was expected to help allay scepticism in Washington over the sincerity of Beijing's promises to open its markets following entry into the World Trade Organisation (WTO).

The vote to grant China permanent normal trade relations, expected on Wednesday, is considered the most important trade vote in Congress since passage of the 1993 North American Free Trade Agreement. President Bill Clinton has made it a top priority.

The planned permission for foreign funds to invest in China's local currency, or A-share, markets in Shanghai and Shenzhen was part of a wider programme of financial market reforms, officials said. The market capitalisation of China's stock markets is about US$350bn, the second largest in Asia after Japan.

Foreign funds are already allowed to invest in China's smaller B share markets, on which trading is denominated in US and Hong Kong dollars.

"China's entry into WTO is definitely conducive to the globalisation of its stock markets," said Gao Xiqing, vice chairman of the China Securities Regulatory Commission (CSRC), the industry watchdog.

CSRC officials said the plan to allow A-share investment by foreign funds would be pursued gradually and would take place before China officially opened its capital account. No dates have been set. The most likely model to be employed is the so-called Qualified Foreign Institutional Investors (QFII) system, which is used in Taiwan and has been successful in reducing currency volatility. The QFII system keeps the inflow and outward remittance of funds under strict ceilings.

"We can have a QFII system without formally opening our capital account," said one official. "It can be regarded as a kind of test as to whether capital account liberalisation is safe."

The proposed liberalisation follows news last week that Beijing is set to create an over-the-counter market to boost bond sales to individuals and allow foreign-invested institutions to underwrite bonds denominated in renminbi, China's currency.