The Shanghai and Shenzhen stock exchanges issued new trading rules yesterday, a move that has helped to drive the country's stock market to a two-year high.

The new rules, effective from July 1, are the result of a revision according to the Securities Law and are another important move in the market's overall development, industry experts say.

"The improved trading rules will promote market activity and boost capital liquidity," said Li Yongsen, an economist at Renmin University.

Under the new rules, the two stock exchanges said they will allow the trading of stocks, funds, bonds, bond repurchases, warrants and other types of securities permitted by the industry regulator.

Details like trading hours, transactions and information disclosure are all outlined in the new rules.

"The rules also pave the way for possible future reform," Li said.

The new rules stipulate that investments in securities must be held until the next trading day, except for those that are allowed to be bought and sold on the same day like bonds and warrants.

This signals that the government might open such trading to stock investors.

"This policy anticipation, as well as other possible innovations, stimulates market trade," said Chen Weiqing, an analyst from CITIC Securities.

According to Chen, these new reforms are likely to come out together with the resumption of initial public offerings (IPO) in the near future.

China suspended fund-raising last year as it sought to make US$230 billion of non-tradable state-owned shares tradable.

On May 8, the China Securities Regulatory Commission (CSRC) allowed listed firms to issue additional shares and promised to give quality companies priority to float shares.

The new rules also state that the two stock exchanges can change the daily 10 percent limit for listed companies after getting approval from the CSRC.

"The stock market gained due to the issuing of the new stock trading rules, as well as a stronger yuan yesterday," Chen said.

The yuan broke through the 8.0000 mark to the US dollar yesterday for the first time since China revalued the currency by 2.1 percent last July. At one point yesterday, the yuan was trading at 7.9972 to the greenback.

The benchmark Shanghai composite index rose 3.82 percent to 1,664.088 points, the highest closing level since June 2004. The Shenzhen composite index, which tracks the smaller market, gained 4.4 percent to finish at 406.97.

Analysts expect the market to stay strong in the near future as more capital flows in from both individual and institutional investors.

The benchmark index has jumped by over 40 percent since the beginning of the year, driven by the government's market-friendly moves. It has quickened its gains in recent days, advancing 11 percent last week.

On Monday, the China Securities Regulatory Commission announced its decision to approve the program by the Yangtze Hydroelectric Power Co. to issue warrants, the first financing project by a listed firm to be given the green light in a year.

The announcement by the regulator indicates China has begun to resume financing by listed firms after a one-year suspension, which was intended to prevent the outflow of capital from the bearish stock market.

The hydroelectric company submitted its application to raise 6.4 billion yuan (about US$800 million) by issuing warrants a year ago.

(China Daily, Xinhua May 16, 2006)