China's chief security regulator will liberalise rules governing mergers and acquisitions (M&A) of listed companies, and encourage the use of preferred shares and M&A funds for investments, the official Shanghai Securities News reported, quoting an official.

The move is part of a wider drive to restructure Chinese industries - many of which are seeing their competitiveness sapped by entrenched overcapacity - while simultaneously restoring confidence in equity markets prior to the scheduled resumption of IPOs in early 2014.

In November, the CSRC rolled out new rules aimed at expediting merger reviews for financially healthy companies in industries targeted for consolidation.

The report quoted comments made at a conference by Lu Zefeng, the China Securities Regulatory Commission's (CSRC) deputy director of public offering supervision, saying that China would reform M&A and company restructuring regulations to make them more market-oriented.

Specifically, the report quoted Lu as saying that the CSRC will look to make transactions more transparent, reduce administrative approvals required for M&A and cooperate with other ministries to improve the way M&A transactions are taxed.

Lu said that the CSRC would also encourage innovation in funding mechanisms for M&A, including the development of M&A investment funds and the usage of preferred shares.

Preferred shares pay fixed dividends and enjoy seniority over common stockholders in the event of bankruptcy, but they typically do not trade on the open market, carry no voting rights, and do not dilute net profits attributable to shareholders.

The proposed introduction of preferred shares has thus been positively received by many stock market investors, who have complained in the past of their shares in listed companies being repeatedly diluted by reissuances of tradeable shares.

China has seen mergers and acquisitions (M&As) in domestic stock markets surge this year, with 137 deals worth $40.6 billion announced between January and early November, according to Thomson Reuters data, as companies struggled to raise funds given the unofficial freeze on IPOs in China, which began in November of 2012.

Many of the deals were so-called "reverse takeovers" by which an unlisted company uses an inert listed company to acquire it, thus effectively listing itself without having to have an initial public offering, skirting the current ban.

Regulators have suggested that IPOs could resume as early as January, mentioning that 50 companies are expected to be in financially acceptable condition to list, but there are more than 800 companies in the IPO queue.

The CSRC has said it will switch from the current approval system to a registration system for IPOs, allowing the market to decide which firms can list and how they are priced.

However, many investors are concerned that increasing the number of companies listed on Chinese stock markets without increasing the net amount of investment funds in the market can only dilute average valuations.

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