(Adds comments of stock exchange chief, paragraphs 7,8)
By Hsu Chuang Khoo and Jalil Hamid
KUALA LUMPUR, March 23 (Reuters) - Malaysia lifted on Thursday its 8-1/2-year ban on the short-selling of shares, the centrepiece of initiatives designed to rekindle investor enthusiasm and wake up a dozy stock market.
Second Finance Minister Nor Mohamed Yakcop, reading a speech on behalf of the prime minister, said Malaysia would also amend stock exchange listing rules to encourage more foreign firms to list.
"The environment is now conducive to announce that regulated short-selling and securities borrowing and lending will be reintroduced in the domestic market," Nor Mohamed told an investors' conference in the Malaysian capital.
Some analysts said the move brings Malaysia in line with advanced financial markets, but the reintroduction of short-selling would apply to fewer than 100 stocks, and some analysts felt more needed to be done.
"I think it will help but it's definitely not enough," said Winson Fong, chief investment officer at SG Asset Management in neighbouring Singapore, which has $2 billion under management.
"As an investor, I always look for earnings growth and if you deliver very fast earnings growth, even if the market is illiquid, I am still happy as an investor. Fast earnings growth will make Malaysia's market valuation more attractive."
However, it would be a few months before short-selling could begin, stock exchange chief Yusli Mohamed Yusoff said.
"We have to come out with the right framework," Yusli told reporters. "We have to make sure the criteria and safeguards are all done properly."
Malaysia promised foreign investors that state-invested businesses were being turned around, but said they would have to wait five to 10 years to see sustained, tangible benefits.
The government controls or partly owns firms that account for at least a third of the local stock market, but some foreign investors have begun to go cold on these firms, complaining that the two-year-old reform drive has stalled.
The head of state investment agency Khazanah Nasional, which is leading the reform drive, told foreign investors that progress was "just about on schedule", and used a cooking analogy to describe how long the task would take.
"While we can expect some benefits over the short- and medium-term as stated, the recipe after all clearly requires us to do the baking over three years at least, with a target for sustained, tangible benefits only between five to 10 years," Khazanah Managing Director Azman Mokhtar said in a speech.
Foreign investors have bet billions of dollars on the promise of reform at state-linked firms, but problems at state-controlled firms such as Malaysian Airline System and car makerHoldings have dented their enthusiasm.
Some bigger state-linked blue chips such as power utility Tenaga Nasional are also viewed as constrained by politics. Tenaga wants a rise in electricity tariffs but the government is reluctant to raise electricity prices when inflation is running near a 6-1/2-year high.
TIME FRAME IS 'REALISTIC'
But Stephen Hagger, head of research at Credit Suisse First Boston in Kuala Lumpur, did not quibble with Khazanah's time horizon of five to 10 years for sustained benefits across the board.
"The time frame is realistic," he told Reuters on the sidelines of the conference in Kuala Lumpur.
Khazanah's Azman defended progress achieved so far: "Overall, while the going is indeed tough, we believe we are generally on track, so long as expectations are realistic."
He also said Khazanah was considering buying out minority interests in some state-linked firms and delisting them, but did not elaborate or identify any companies. The state is rumoured to be interested in buying out minority interests in.
The government is also in no mood to sell down state interests any further at this point.
"We are in value-creating mode," Nor Mohamed told reporters. "It is not our focus to be selling stakes in government-linked firms now. We have great belief that we can create value in our companies at this time."
Prodded by the government, 14 state-linked firms unveiled their financial targets for the first time on Wednesday. Malaysia was Asia's worst-performing market outside China in the past 12 months and is one of the region's shallowest, turning over just a quarter of its market capitalisation last year.