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China Says to Limit Flow of Non-Tradeable Shares

China's securities regulator on Sunday published rules that will limit the flow of large amounts of shares formerly subject to lock-up periods directly into the stock market, likely boosting market sentiment.

The China Securities Regulatory Commission (CSRC) said that any large sales of formerly non-tradable shares will have to be conducted in a "bulk" trading system, separate from the normal exchanges in Shanghai and Shenzhen, effective immediately.

The move addresses one of the concerns that has been hanging over the market in recent months -- the potential impact of the release of huge amounts of shares, as firms are allowed to sell them after lock-up periods following their completion of share structure reforms.

It is aimed at preventing an excessive influx of new shares into the secondary market, which could "put constant pressure on share prices and distort the price formation mechanism," the CSRC said.

"This is favourable to stabilising investors' expectations towards the divestment of non-tradable shares," the agency said in a statement on its website (www.csrc.gov.cn).

Specifically, the rules stipulate that any sale of non-tradable shares over the course of one month that represents more than 1 percent of a firm's total equity would have to go through the separate trading system.

Such shares cannot be released during the 30 days before the release of a firm's annual or half-yearly report, it added.

China's main stock index, the Shanghai composite, is down nearly 50 percent from its peak in October of last year.

One concern cited by investors is the large increase in the supply of new shares, which has come both through new offerings and the release of formerly locked-up shares.

In October 2007 alone, about 468.9 billion yuan ($67 billion) worth of formerly non-tradable shares poured into the market, according to local media reports.

The regulator added that the measure was being taken to help Chinese capital markets face increasingly uncertain global economic conditions, which have hurt investor confidence.