China increasingly wants to attract foreign investment in its financial markets, but few are stepping up to take their capital to its markets. One reason may be that the rules of its markets aren't well understood, and in many cases, changing rules make it impossible for institutions to feel safe about their investment.

In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and Jordan Wathen discuss some of the reasons Chinese stocks are still off limits for many international investors, particularly large institutional investors.

A full transcript follows the video.

This podcast was recorded on Dec. 12, 2016.

Jordan Wathen: What's happened recently is that China has been limiting the amount of money that companies and individuals and basically everyone can take out of China. This has gone on for a long time, but more recently, there was a change to where companies can only withdraw something like $5 million a day from China in dollars, versus $50 million a day previously. So as far as business goes, that's certainly a limitation. When you look back more, broader, when you think about China and markets, especially as it relates to stock and bond markets, is that last year, during a crash in the stock markets in China, they put some pretty strict limitations on how you could invest or whether you could even buy or sell.

Gaby Lapera: Yeah, absolutely. I don't know if you guys remember this after all the financial craziness that's already happened this year, but China had a little bit of a roller-coaster ride, and they locked down investors' abilities to sell bonds when the Chinese market was crashing. Afterwards, they released a statement saying, "We don't understand why people don't want to invest in our bonds, but we're incentivizing them in XYZ ways." But it seems like there's a little bit of a gap between them realizing, "Ah, yes, we have blocked people's ability to allow the market to function as it should. This is why people don't want to come to our bond party."

Wathen: Right. I think one of the things, too, as individuals, it's kind of hard to understand maybe the needs of institutional investors. But one of the things they limited, first of all, they limited short-selling under the threat of arrest. So you can't run a sophisticated long-short strategy, which turns off all the hedge fund managers in the world. And then, you have a matter where, if you own more than 5% of a company, you're restricted on your ability to sell. So your highest-conviction ideas, you had better have a whole lot of conviction in them, because you could potentially end up holding them for a long time. Basically, you could end up holding them into perpetuity or until China decides, "OK, fine, we'll let you sell."

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