China's shares rallied yesterday as investors were cheered by the government's expanded efforts to push the ongoing state share sale reform.

Yesterday the benchmark Shanghai Composite Index jumped 2.46 per cent to end at 1112.288 points. Turnover at Shenzhen and Shanghai totalled about 18.4 billion yuan (US$2.2 billion), 34 per cent more than the previous close on Friday.

On Sunday market watchdog China Securities Regulatory Commission designated 42 domestically listed firms for the second round of non-tradable share floating experiment.

Market observers said compared with the first four pilot firms selected for the floating experiment, this batch of firms is more representative and covers broader fields.

Big blue chips such as steel heavyweight Baoshan Iron & Steel Corporation Ltd and three Gorges Dam operator China Yangtze Power Corporation Ltd are both on the second round's list.

The broadened programme eased complaints about the government's failure to allow the country's best companies to sell their state shares to the public.

This batch of pilots are all good market performers without a single loser. Each of them recorded an annual profit rate of more than 7 per cent last year.

Moreover, new approaches are proposed for the second turn of experiment.

One firm has applied to use warrants and another has applied to buy back and write off some tradable shares and then float a certain number of non-tradable shares.

These new traits of the second batch delivered confidence to the traders for a buoyed market, said Xu Gang, who also predicted a small increase of the shares later.

Meanwhile, the government had taken a slew of market-friendly steps such as temporarily halving personal income tax on dividends gained by individual investors and allowing the listed firms and big shareholders to buy back the public shares.

Last Friday, the State asset watchdog also announced state shareholders would maintain their controlling positions in some pivotal sectors crucial to the national economy and security. The floated shares will not immediately be put on the market.

This move greatly relieved investors' concerns over the impending flood of shares and price slumps, said Yi Xian Rong, a senior finance researcher in the Chinese Social Academy of Sciences.

The first round of experiment helped investors to understand the meaning of share restructuring reform, said Dong Chen, a senior analyst at China Securities.

People's nervousness is put at ease through the demonstration of the first round of experiment and they got a clear idea of what floating reform means, he said.

As a result of the planned economy, two thirds of China's shares are controlled by state or legal bodies and are not negotiable.

The non-tradable shareholders have to make some compensation to the tradable shareholders when taking the floating reform because the latter always shoulder the market price fluctuation.

Three of the first four pilots gained approval for their compensation proposals at the general shareholders' meetings. Only one failed to gain the approval of the standard two thirds of non-tradable shareholders.

The traders are now keenly watching the market move, especially the compensation volume of these newly designated firms, said Dong Chen.