CHINA'S securities regulator will encourage more companies to sell shares on domestic stock markets and increase the proportion of free float for traded companies after the benchmark index surged 162 percent last year.

The China Securities Regulatory Commission will "expand the scale of fundraising in the capital market, increase the amount of tradable shares and push forward the listing of large companies and high-quality medium-sized companies," Shang Fulin, chairman of the watchdog, said last Saturday at a conference in Beijing.

The regulator wants to deflate the stock market without causing turbulence by increasing the supply of shares through initial public offerings. It also plans to set up a separate trading board for technology-heavy start-ups, Bloomberg News said.

"The regulator uses the tactic of share sales to soak up liquidity and prevent the markets from rising too fast," said Wu Kan, who manages the equivalent of US$41 million at Dazhong Insurance Co in Shanghai.

The CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, closed at 5699.15 last Friday, gaining 23 percent since touching an almost four-month low on November 28. The CSI 300 was the best performer last year among the major benchmarks tracked by Bloomberg News after almost tripling.

The measure is valued at 51 times reported earnings, the most expensive in the Asia-Pacific region, as domestic investors have been shifting into equities from bank savings to seek returns that can beat an 11-year high inflation rate.

The total market capitalizations of stocks in the Chinese mainland's Shanghai and Shenzhen exchanges reached US$4.7 trillion last Friday, unseating Japan to become the world's second-biggest, next to the United States.

Japan's market capitalization was US$4.4 trillion, as the worst start since 1997 has chipped away 7.8 percent at the Nikkei 225 Stock Average so far this year.