UPDATE 1-China to raise maximum QFII quota, HK shares surge

* Individual QFII quota limit to rise to $1 bln from $800 mln

* SAFE says no plans to increase overall $30 bln quota

* Less than $15 bln of overall QFII quotas being used now

* SAFE says institutions not allowed to trade quotas

* HK shares climb on hopes move will spur more buying

By Zhou Xin and Jason Subler

BEIJING, Sept 4 (Reuters) - China announced new draft rules on Friday on inbound portfolio investments, increasing the amount individual institutions can invest in the country's stock markets, in a move likely to bolster market sentiment.

The upward limit for individual institutions' quotas under the Qualified Foreign Institutional Investor (QFII) programme will be raised to $1 billion from $800 million under the draft rules, the State Administration of Foreign Exchange (SAFE) said.

Hong Kong's Hang Seng Index .HSI soared after the announcement, ending up nearly 3 percent on the day. The Shanghai stock exchange .SSEC had closed up 0.6 percent before the announcement.

The move comes after a sharp drop in Shanghai shares in August amid growing concerns about a drop in Chinese bank lending.

The changes will make it possible for large investors to channel more portfolio investments into China's capital markets.

However, the overall investment quota of $30 billion will remain intact, as less than $15 billion of that amount has been used so far, Chu Yumei, an official with SAFE, told a news conference.

"This new measure could only increase the potential supply of funds in the stock market, but nobody knows how much of the expanded quotas would be used," said Qiu Yanying, an analyst at TX Investment Consulting Co Ltd in Shanghai.

"Of course this move reflects the government hope to boost market sentiment -- from this sense, it can be interpreted as a bullish factor for the market."

The agency will be seeking market feedback on the rules until mid-September, but such rules are typically very close to their final state before being published in draft form.

The agency said it would also try to ensure that the institution that applies for a particular quota is the one that uses it and will crack down on illegal transfers or trading in quotas.

"The new contents of the regulations are mainly about attracting medium- and long-term capital, facilitating investment operations and risk control, and enhancing management and statistical monitoring of capital transactions," SAFE said in a statement accompanying the draft rules.

The agency also said it would reduce the lock-up period for some investors to three months, and that responsibility for approving QFII return remittances had been passed to local SAFE offices from the central office.

It will also allow QFIIs to set up separate accounts for their own proprietary investments and for open-ended China funds; previously they were combined in one.

The lower limit for a QFII fund is $20 million.

The new rules mark the latest expansion in the programme, formally launched in 2002. (Additional reporting by Aileen Wang and Simon Rabinovitch) (Editing by Kim Coghill)