Dec. 13 (Bloomberg) -- China will exempt foreign investors in the nation's local-currency securities from paying capital- gains tax, the latest attempt to revive stock markets that have lost more than half their value in the past four years.

The State Administration of Taxation announced the exemption, which applies to foreign investors licensed to buy yuan shares and bonds, in a statement dated Dec. 1 that was placed on its Web site today. The statement didn't specify the level of the tax.

The government is revamping rules and expanding the amount foreign institutions can invest in China's $314 billion stock markets after benchmark indexes fell as much as a quarter this year. The tax exemption may spur trading by UBS AG, Citigroup Inc. and 30 other overseas investors that have been approved to spend a combined $5.5 billion on China's local-currency securities.

``This is good news for foreign investors as it removes all ambiguity on the issue of capital gains tax,'' said Sean Hu, who helps manage $400 million at Martin Currie Investment Management Ltd. in Shanghai. ``This was a grey area in the past. It may encourage more investment.''

The Shanghai composite index rose 0.1 percent and the Shenzhen composite index gained 0.3 percent, erasing earlier losses after the tax administration's announcement. The indexes have lost 9.5 percent and 13 percent in U.S. dollar terms this year, the fourth- and third-worst performing of 80 global benchmarks tracked by Bloomberg.

Market Slump

China's stock indexes slumped to more than five-year lows this year, hurt by a series of brokerage scandals and concern about a potential flood of unwanted stock. The government started a program this year to convert more than $200 billion of non- tradable, mostly state-held holdings into shares that can be bought and sold on exchanges.

To boost demand, the government in July said it would more than double to $10 billion the total quota available to foreign investors under the so-called qualified foreign institutional investor, or QFII, program. China has been using the program to open gradually its domestic stock market to overseas capital.

Regulators also plan to let overseas fund managers sell holdings after three months instead of one year, making it easier for them to take money out of the country, Qi Bin, a deputy director at the China Securities Regulatory Commission, said in an interview in Singapore on Nov. 18.

``The tax relief would attract more foreign investors to invest in China's stock market, and leave them with more money to buy domestic shares,'' said Yan Ji, who helps manage the equivalent of $720 million at domestic asset manager First Trust Fund Management Co. in Shanghai.

Equal Footing

Under the QFII program, investors with at least $10 billion in assets and $50 million to spend can apply to the securities and foreign-exchange regulators for a license and a quota to buy yuan shares and bonds.

China also plans to speed up the application process and lower the threshold for applicants to attract more mutual funds, pension managers and insurers, the securities regulator's Qi said in November.

``The new rule finally gives QFII investors certainty on the tax front, which is extremely important if the QFII regime is to continue to expand in scale,'' Nicole Yuen, head of China equities at UBS, said in an e-mail. UBS, Europe's biggest bank, has the biggest QFII quota, at $800 million.

The ruling places foreign investors on an equal footing with domestic institutions, which are exempt from capital gains and business tax, Yuen said. ``Any other outcome would have an adverse impact on the further development of the QFII regime.''

Bigger Quotas

Temasek Holdings Pte, a Singapore state-owned investment company, and AIG Global Investment Corp., a unit of the world's biggest insurer, last month became the latest investors admitted to the program.

Credit Suisse First Boston and HSBC Holdings Plc on Nov. 15 won approval to double their quotas. New York-based Citigroup, the world's largest financial institution, has the second-biggest investment limit at $550 million.

Edinburgh, Scotland-based Martin Currie received a $120 million quota from regulators on Nov. 29 after being approved to join the program in October.

To contact the reporter for this story: Yanping Li in Beijing Yli16@bloomberg.net ; Janet Ong in Shanghai at jong3@bloomberg.net