* China pledges to promote fair and open capital markets
* Cabinet promises increase foreign investment quotas
* Commitment to allow direct bond sales by local govts
* Promise to reduce restrictions on commodity derivatives (Adds detail on policy announcement)
SHANGHAI, May 9 China pledged on Friday to push ahead with a broad range of capital market reforms as it seeks to encourage more efficient capital allocation, increase foreign investment and improve transparency of its markets.
In a wide-ranging statement of policy principles, the State Council said it would develop a system for direct bond issuance by local governments, streamline the approval process for initial public offerings (IPOs), and remove some restrictions on the use of financial derivatives.
Separately on Friday, the Securities Association of China issued new rules governing IPOs.
While the government has previously discussed many of the reforms mentioned by the cabinet, the statement signals a fresh commitment to pushing ahead with the proposals.
Quotas would be increased for both inward and outward foreign investment under the Qualified Foreign Institutional Investor (QFII) and Qualified Domestic Institutional Investor (QDII) programs, the cabinet said.
"China's capital markets are still not mature, and some systemic problems still exist. New problems are continually appearing," the State Council said in a statement posted on its website late on Friday.
"We will persevere with market-based and rule of law-based orientation and uphold open, equal, and fair market order," the statement said.
In China's policymaking process, the State Council sets out goals and principles, leaving the relevant agencies -- including the People's Bank of China, the China Securities Regulatory Commission, and the China Banking Regulatory Commission -- to follow up with specific regulations.
The cabinet said it would create a system for direct bond issues by local governments. Currently, they are forbidden from directly selling bonds or borrowing from banks, but have skirted this ban by borrowing through opaque special-purpose vehicles.
On derivatives, the cabinet promised to develop more varieties of commodity future and options, commodity indexes and tradable carbon emission credits.
It pledged to reduce restrictions on the use of derivatives by both institutional investors and corporations for the purpose of hedging and risk management.
The State Council also promised to strengthen enforcement against false disclosures by corporate bond issuers and insider trading in the bond market.
The cabinet said it would work to develop the market for private equity investment funds, private asset management plans and venture capital funds, while cracking down on illegal fundraising practices.
The State Council said it planned to allow some bonds to trade on both the interbank bond market and stock exchanges. Currently, the two markets are strictly segregated. (Reporting by Gabriel Wildau; Editing by Richard Borsuk and John Mair)