– Wei Gu is a Reuters columnist. The opinions expressed are her own –

China has talked about plans to allow foreign companies to float on its domestic stock markets for at least a decade, but that’s all there has been: talk.

Now would be a good time to convert some of that talk into action. Beijing has been struggling with its own investment strategies: the state gets feeble returns on the U.S. Treasury bonds it owns, and its equity stakes in foreign financial firms are well under water.

So why not diversify by allowing 1.3 billion Chinese citizens have a go rather than a few bureaucrats working for China’s sovereign fund? The many might even do better than the few. And it would give Chinese savers a chance to buy global blue chips at credit-crunch prices.

The idea of opening up China’s equity markets to foreigners may seem fanciful, but it dovetails with another big national objective. China wants to build Shanghai into a global financial centre by 2020, but that requires a deeper and internationalised equity market. Only when that is in place will foreign money descend on Shanghai, together with an army of bankers, lawyers and accountants.

The market capitalisation of Shanghai is now the world’s fourth largest, but it is dominated by state-owned firms with only a handful of foreign joint ventures and a few private companies.

The market is off-limits even to many of China’s own best and biggest companies, such as the world’s largest telecom operator China Mobile and China’s top offshore oil and gas producer CNOOC.

They are listed in the offshore market of Hong Kong and despite their expressed interest to return to the mainland, continue to fail to win the green light from Beijing.

Indeed there is no other country which relies more heavily on offshore financing than China. One fifth of the foreign companies listed on Nasdaq are from China, the largest percentage in the world. By pushing its top companies to list abroad, China has gained foreign capital at the expense of the development of its equity market.

Meanwhile back in Shanghai too much money is chasing too few good listed companies. The same companies are often valued at a premium in the mainland versus in Hong Kong.

Chinese investors need more and better investment opportunities. China needs to realise the competition of the 21st Century is not just about amassing capital, but also about building companies that can create wealth.

WHO COMES FIRST?

In the past decade, most of the barriers to open equity markets have been removed. China completed a share reform programme that allowed formerly untradeable state-owned shares to trade, and China’s accounting rules are now similar to global standards.

A big block remains in the shape of China’s capital controls, which prevent firms from repatriating profits, but the State Administration of Foreign Exchange recently said it will consider relaxing the controls once foreign companies are allowed to list.

When China first talked about introducing foreign listed companies a decade ago, Unilever, whose Lux soap 20 years ago was as coveted in China as Louis Vuitton bags are now, was expected to be the first.

Although that seems unlikely now, multinational manufacturers are still expected to be interested in the hope that a China listing can raise their profile in what is seen as potentially their biggest market.

Instead, first in line will probably be foreign banks keen to raise money in China to fund their local operations. As things stand, their yuan deposit base is too small due to their limited branch network.

HSBC is said by British officials to be in discussions to be the first foreign company to go public in China. The bank, with a Shanghai branch office that opened some 150 years ago, has gained a lot of goodwill for promising not to sell its strategic investment in Bank of Communications while other foreign banks rushed to the exits.

A full listing of foreign companies will offer an upside for China Inc. in that domestic firms with global ambitions will be able to bid for firms using their own shares and Chinese shareholders will have a say on global deals.

In addition, by allowing the Chinese to buy a piece of the world’s blue chips on their home soil, the change will assist in the country’s ambitions to make the yuan an international currency while keeping a certain amount of capital controls.

China’s leaders have made clear they see the credit crisis creating opportunities to flex their financial muscles. Here’s one opportunity they shouldn’t let pass them by.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

China investors should care about three major numbers this year: 8 percent economic growth, its 4 trillion yuan ($586 billion) stimulus package, and the 10 industries revitalization plan.

The first is the government’s economic growth target and the second is a spending plan to shield the economy from the global financial crisis.

A lot has been said about the first two numbers, but not enough about the third. Indeed, there are at least three misunderstandings about the latter.

First, perhaps misled by the word “revitalization,” many people talk about the plan as if it is another set of recovery measures to boost investment demand. On the contrary, it mostly contains policy measures aimed at reducing supply.

Thus, there is little reason for investors to be disappointed if their favorite sectors, such as property, are not included.

The 10 industries consist nine sub-sectors of manufacturing and one service sector related to that, logistics, which have all been hit hard by the collapse of overseas demand.

The plan is designed to buy time by achieving an orderly reduction in these industries’ capacity, rather than a reduction that could become disorderly if left to market forces, says Qing Wang, Morgan Stanley’s China economist.

But will that work? That leads to the second myth.

The revitalization plan is mostly about state-owned companies buying other state firms and many in China believe that if the government has a wish, it has a way.

But that is not always the case. Companies and local governments try their best to avoid arranged marriages. History has shown that such deals can take as long as a decade to complete.

In the current economic environment, designated acquirers won’t be interested in taking on more workers and equipment and local governments hate to lose tax revenue from factories on their turf.

Even if the government can drive consolidation, they cannot successfully compel integration, thus little synergy can be extracted out of those deals.

Investors should also bear in mind that Beijing’s top priority is to protect jobs. Any company with plans of cutting more than 20 jobs needs to brief local authorities one month in advance. So far, state-owned companies have largely refrained from staff reduction.

But if Beijing does not allow layoffs and closures, then it will be impossible to reduce capacity even after arranged mergers.

So, don’t expect restructuring plans to lead to much capacity reduction, even though it is desperately needed.

A point in question is China’s steel industry. Now the world’s largest steel maker, China last year produced 660 million tonnes of crude steel, 100 million more than demand.

The government has said it will strive to eliminate just 25 million tonnes of obsolete steel production capacities by 2011, only a quarter of the current extra capacity.

The third myth is that all industries are treated equally. The reality is that policies for those 10 industries differ widely.

The priority for the electronics industry is “rural demand,” for textiles “upgrade and move up the value chain,” for nonferrous “contraction,” and for equipment “strengthening and innovation.”

For steel, the focus is consolidation, as demand is not likely to come back soon.

“The best time for steel is over frankly,” said Larry Wan, a fund manager at KBC Goldstate Fund management in Shanghai.

“The government is motivated to cut capacity, but it will face strong resistance from below.”

Beijing also wants the auto industry to consolidate. It specifically said that it wants the top 14 auto makers to be reduced to 10, but has not set a target for capacity reduction. Instead, it is planning for capacity to grow 10 percent annually in the next three years.

The policy for autos is more about stimulating demand. Measures include reducing the sales on smaller cars, providing subsidies to encourage rural residents to replace old vehicles, and making more financing available for consumers.

It might be tempting for investors to dismiss Beijing’s interventionist approach. But they should still study the plan.

The government has never before come up with such a sweeping package that includes detailed long-term goals for so many key industries. It could serve as a curtain raiser of future industrial policies.

“The plans have made it clear where the government support lies,” said Yang Chengzhang, chief economist at Shenyin Wanguo Securities. “Every company needs to position itself according to the plan to get maximum room for its development.”

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –