China has suspended approvals for international buyers looking to acquire domestic securities brokerages in a further blow to overseas firms looking to expand in the booming Chinese equities market.

The decision comes just one day after the Henry Paulson, the US Treasury Secretary, sounded a more conciliatory note towards Beijing, warning US lawmakers that imposing tariffs on Chinese goods in an effort to narrow America's trade deficit would be counter productive.

However, just days ahead of a visit by Mr Paulson to China, the country's securities regulator said it would also suspend the expansion of domestic brokerages and would not issue new licenses, according to a statement published in the official Shanghai Securities Journal.

The China Securities Regulatory Commission (CSRC) said exceptions would be made only for deals judged to be capable of reducing risk.

The move appeared to reverse Beijing plans to draw on foreign investor capital and management expertise to help clean house in a sector plagued for years by corruption, poor management and heavy losses.

The action also threw up further evidence of what appears to be efforts by Beijing policymakers to restrict and protect from foreign investment certain sectors of the economy, especially banking and finance.

Speaking at a forum near Beijing, the head of the CSRC, Shang Fulin, said that the brokerage issue would only be looked at again after China completes its overhaul of the industry.

He said: "By the end of October next year, everything can be completed and then we can run the pilot project for joint-venture securities institutions."

The temporary suspension was aimed at strengthening domestic brokerages as part of a program that seeks to better control the unruly sector, he added.

The announcement is set to scuttle foreign houses’ ambitions to buy into domestic brokerages, a process that has already been fraught with regulatory hurdles.

CLSA, the Asian investment banking arm of French bank Credit Agricole, is among those groups seeking to set up broking operations in China by buying into an existing domestic player. So far it has failed to win approval.

Swiss investment bank UBS has secured preliminary approval from the CSRC for its 1.7 billion yuan purchase of a 20 per cent stake in Beijing Securities but is also yet to receive final clearance.

The decision also raises the possibility of China violating World Trade Organisation rules. Under its WTO commitments, China must allow foreign investors to hold up to 49 per cent stakes in local brokerages by the end of this year. The current ceiling is capped at 33 per cent.

Liang Jing, an analyst with Guotai-Junan Securities in Shanghai told AFP: "The CSRC wants to protect the domestic market to some extent and they can use the opportunity to cultivate one or two domestic companies that can rival foreign investment houses."

Zhang Zhi, an analyst with Everbright Securities based in Shanghai, said the move had been expected for some time. "Regulators had already decided the size and scope and even the number of people they want in the whole industry, so they are not going to grant more approvals," he said.

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