CHINA'S Cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said.

The State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn't authorized to speak on the issue.

China's action contrasts with regulators in the United States, Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. The government is betting the changes will boost trading without spurring further falls after state share buybacks helped the CSI 300 Index rebound from a two-year low, Bloomberg News said.

"It's quite positive for the market and will help attract fresh capital into equities," said Wu Kan, a fund manager in Shanghai at Dazhong Insurance Co. "Given the current level the index is standing at now, I do think some investors will buy low through margin trading so as not to miss the boat."

In short sales, investors sell stock they don't own, betting they will be able to buy it back at a lower price and profit from the difference.