China's securities regulator said Monday that it will soon end a ban on share sales after a government program to trade more than US$200 billion of mostly state-owned stockholdings was implemented without causing a market slump.

The China Securities Regulatory Commission will initially allow companies to sell shares to selected investors through placements, followed by public sales of additional shares and, lastly, initial offerings, the regulator said in a statement on its Web site. The statement did not give dates for the plans.

China halted share sales last May to prevent a flood of equity as companies pursued plans to convert their nontradable holdings - part of an effort to improve corporate governance and bring China's $340 billion stock markets in line with global standards. The benchmark Shanghai Composite index has risen 18 percent this year and the Shenzhen Composite index has climbed 25 percent.

"There is a need to raise the proportion of direct financing as the economy continues to grow, and with high liquidity in the financial markets and as personal and corporate deposits are rising," the regulator said in the statement.

The government scrapped attempts to convert nontradable equity into common stock in 1999 and 2001 after shares sank on concern the plans would flood the market with unwanted equity. This time, the 1,300 companies involved were advised to arrange compensation programs and lockup periods to reassure investors.

The share-conversion plan has gone smoothly and steadily, and the issue of nontradable and tradable classes of equity looks likely to be resolved soon, the regulator said in the statement.

"From our study of the proposal, it looks well thought-out and it looks like the CSRC has consulted many parties, including tapping the expertise of foreigners to come up with this," said Yang Jianhua, a fund manager at Great Wall Fund Management in Guangzhou.

Zhou Qinye, executive vice president at the Shanghai stock exchange, had said in a January interview that China would lift a ban on domestic share sales by April or May.

The commission detailed draft rules that aim to provide a more market-oriented pricing mechanism for new shares, control the use of proceeds and encourage companies to pay dividends to shareholders, according to the statement.

Companies that completed the process of converting their nontradable stockholdings more than six months ago will be the first allowed to sell new shares, the statement said.

The regulator is also streamlining the process for companies seeking to sell additional new shares. Within six months of getting approval from the commission, companies can choose when to sell the shares.

"The rules take into account the interests of shareholders, investors and not just the companies alone," Yang, of Great Wall, said. "This is good for the long-term development of the capital markets."

Companies that sell shares publicly must use a sale manager, though they will be allowed to conduct private placements themselves. Companies can sell shares through private placement to not more than 10 strategic investors. The proceeds from such share sales should not be used to buy securities or invested in companies whose main businesses are related to securities.

The regulator will allow companies to issue warrants attached to corporate bonds to help develop the bond market, it said in the statement. A warrant is a company-issued certificate that represents an option to buy a certain number of securities at a specific price before a predetermined date. A warrant has its own value and can be traded on the open market.

Green light for short-selling

China plans to let investors buy stocks using borrowed money and sell shares they do not own for the first time, to channel more of the nation's $4 trillion of bank deposits into the stock market and boost trading.

The China Securities Regulatory Commission may select five brokerages to start margin financing and short- selling services this year, according to a draft plan sent to the Shanghai and Shenzhen stock exchanges and obtained by Bloomberg News. The pilot program may be expanded to other companies later, it said.

"The move will inject lifeblood into the stock market," said Qiu Zhicheng, an analyst at Haitong Securities in Shanghai. "It will alleviate concern that the market will be weighed down by listings of big companies."

The changes may generate income for brokerages and boost funds available for investment as the government prepares to end a yearlong ban on public share sales, paving the way for offerings by companies including Air China. China wants to bring its stock market in line with global practices and sustain a recovery in benchmark indexes from eight-year lows last year.

The regulator plans to set up a company, called China Securities Finance, by the end of this year to provide loans for brokerages to finance margin trading, the draft said. The commission also proposes to let brokerages borrow directly from banks to fund client subscriptions to initial public offerings.