SHANGHAI. July 6: If Chinese plans work out. Shanghai may boast the third largest stock market in Asia after Japan and Hong Kong, reports Reuters.

Wall Street Investment bankers could be helping to manage mutual funds from the glittering skyscrapers of the city's Pudong financial district. Pension funds may be hedging their Investment risks with China's first ever index-linked futures.

Plans for all of this are now on the drawing-boards, driven not Just by Shaghafs ambitions to become ^n International financial centre, but also by a reformist Chinese leadership.

As they ponder China's vast funding needs — to cover pensions for an ageing population, social welfare and benefits for a growing army of unemployed — reformist Chinese leaders ap-pear to have concluded they will need deep, liquid, sophisticated markets and foreign expertise.

“I think China Is quickly going to become one of I he biggest equity markets In the yvorld and one of the biggest bond markets In the world." said William Overholt, head ol macroeconomic research at Nomura International In Hong Kong.

But one problem Is preying on the mind of Premier Zhu Rongji: China needs at least 1.8 trillion yuan (621 7 billion) — or 22 per cent of last year's GDP — to cover unfunded pension liabilities of this state employees.

Also driving the change Is China's Impending membership in the World Trade Organisation.

Beijing has pledged to open Its banking. Insurance and securities sectors to foreign com-petition after It Joins the global trading group.

A slew of financial reforms are now under discussion at China's two stock markets by the China Securities Regulatory Commission and the People’s Bank of China. They include:

A merger of the Shanghai and Shenzhen stock exchanges that would create a $490 billion Chinese share market.

A merger of the domestic A share market with the hard currency B share market for foreigners

Introduction of Index futures and other derivatives to attract institutional Investors like insurance and pension funds

A more flexible yuan currency. leading to eventual convertibility on the capital account after entry to WTO.

Anthony Ncoh chief adviser to the China Securities Regula-

tory Commission, said in May that pension reform was a "critical driver" needed to help propel the development of the capita! markets.

China started a new pension system in 1997. but It did not cover millions who were hired or retired before then, leaving the government with billions of yuan in unfunded pension liabilities.

And the burden on the government will grow as China's restructuring state firms lav off Workers and the number ol retirees climbs at an annual rate of more than three per cent China now has 128 million people over age 60 and some estimates show Hint number ballooning to more than 400 million by 2050.

Ncoh said that under other

scenarios, future pension liabilities could reach 30 per cent ol present GDP. or more.

Andy Xie. Greater China economist at Morgan Stanley Dean Witter in Hong Kong, said Beijing needed a stock market attractive enough to encourage Chinese to invest their savings and liquid enough to allow sales of state assets to fund so-ctal welfare.

“The stock market is the key to economic growth, not just to economic efficiency." said Xie By (lie end of next year, all these things must and will hap-|>en "

John Lu, an analyst at ING Barings in Shanghai, said: I think the ultimate target for the fgovernment Is they can cash out n the capital markets to hind their social liabilities'

Overhauling China’s stock markets yvill be an awesome challenge.

The vast majority of listed firms are government-owned, dumped on the markets to save state banks from having to fund them. There could be a stampede out of many of these shares if investors had the choice of buying into well-run private or semiprivate firms.

And in the process of creating markets deep enough for institutional investors, the fear is that retail investors yvho account for 90 per cent of trading could take fright.

Public anger over a bungled stock market lottery tor new shares triggered riots tn Shenzhen in 1992.

Fears of a similar backlash in 1994 led the government to

Irecze new listings

But while the talk of change tn the financial markets and Chinas pending WTO entry have led to a feeling the reform pace is gathering, many foreign business executives are sceptical.

The specific deadlines and opening measures in the WTO agreement had fuelled some optimism that reform was accelerating. said Christian Murck. senior country officer and general manager for Chase Manhattan Bank in Beijing

"Ou the other hand, this phases in over a period ranging from two to five years after accession So I don’t know any body in the business comma nity on the ground in Beijing yvho has been saying this is > stiver bullet that s going to solve everybody's problems in any industry." Murck said.

A European banker in Shanghai compared China's opening to the Forbidden City, the imperial palace, in Beijing