By Lu Jianxin and Pete Sweeney

China issued new rules on Friday to free issues of public mutual funds from regulatory approval in what asset managers said was a major step to expand the still small number of institutional investors in the country's stock market.

The step is among a slew of other regulatory moves made recently by the government aimed at letting the markets play a "decisive" role in the world's second-largest economy by 2020.

The China Securities Regulatory Commission (CSRC), in new rules to take effect on Aug. 8, will adopt a Western-style registration-based system in which fund firms need only register with the regulator to issue products, the CSRC said in a statement published in its official microblog.

The CSRC "will not restrict the quantities of a product, will not artificially control the pace of fund issues and will not interfere the time of issuance," CSRC spokesman Deng Ge was quoted as saying in the statement.

Simultaneously, the regulator will strengthen supervision on whether fund firms have operated in line with regulations, enforcing compliance and implementation to protect the interest of investors, Deng said.

The changes "reflect a move toward making China's fund industry market-oriented and operate in line with international practices," said Wang Ming, head of marketing at Shanghai Yaozhi Asset Management Co.

"Currently, bureaucracy in the approval system is time-consuming, with some innovative products take months, even half a year to win approval, among other problems," Wang said.

Among other improvements in the new regulations, the CSRC promised to finish all registration processes for mature products within 20 days after related documents reach the regulator.

"For complicated and innovative products, the CSRC may ask fund managers to offer more materials," including those on technical preparations on risk control, the new rules showed.

The watchdog will also raise penalties for those fund firms found to have irregularities, the CSRC said without elaborating.

By the end of May, China had a total of 91 mutual fund companies with 680 funds managing total assets of 7.25 trillion yuan ($1.2 trillion), making the domestic fund industry the 10th biggest in the world, official data shows. Publicly issued funds accounted for 54 percent.

Stock holdings by professional institutional investors, dominated by mutual funds and brokerages, only accounted for 10.87 percent of China's total stock market capitalisation by the end of last year.

The fledging market is dominated by much less sophisticated retail investors, a result that has led to rampant speculation in loss-making and other less-capitalised firms and a lack of interest in blue-chips favoured in more mature markets.

To boost institutional investors, the CSRC has issued new guidelines to encourage fund managers to innovate and promise to let more foreign firms into the domestic industry.

On Friday, the CSRC also published a draft of new rules to support the country's fledging private equity (PE) funds to make products more market-oriented.

It is not clear when formal rules on the PE funds will be promulgated, but the draft is typically finalised with modifications within two months after seeking public feedback.