BEIJING, Sept. 5 (Xinhua) -- The China Securities Regulatory Commission (CSRC) will allow shareholders of listed companies to issue exchangeable bonds, a move to ease oversupply in the stock market that has helped to drive down share prices.

    The CSRC published a draft regulation on the newly-introduced financing tool on its website on Friday night, soliciting public comment by Sept. 12.

    Shareholders can issue bonds with an embedded option to exchange the bond for the stock of a company other than the issuer at least a year after the issuance, according to the regulation.

    Such bonds could provide shareholders with a new funding channel other than simply dumping their holdings. This would ease the impact of heavy selling, said an unidentified CSRC official in a statement on the website.

    Heavy selling has been cited as a factor that has aggravated liquidity strains in the country's flagging stock market.

    The Shanghai index is down more than 58 percent this year and more than 63 percent from its peak in October last year. It fell 3.29 percent to 2,202.45 on Friday.

    "The move will ease market concerns about the release of previously locked-up shares and make it easier for shareholders raise funds," said Shui Pi, an independent financial commentator.

    The regulators will continue to adopt innovative market tools to guide large-volume selling by shareholders rather than extending lock-up periods or imposing windfall profits taxes, said the CSRC official.

    The agency is also preparing to start a system of secondary offerings. The system would have securities dealers take up stocks from shareholders and hold them for some period, delaying the impact of the sales on the market.

    However, such delays will only prolong the bear market without fully resolving the problem, according to independent stock analyst Hou Ning.

    "To save the market, we need to help more private enterprises, which can really boost the economy, get listed," said Hou.

    Cinda Securities analyst Liu Jingde said these moves were good news in the short term but wouldn't change the weak market fundamentals, because heavy selling was not the only factor behind price declines.

    Figures from the CSRC show 480 million shares were freed from lock-ups and sold by shareholders in August, 43 percent less than in July. However, the benchmark Shanghai Composite Index still tumbled more than 20 percent in the month.

    Last month, the industry regulator raised the refinancing threshold for listed companies. It said companies could only carryout refinancing plans if they had paid dividends to shareholders equal to at least 30 percent of distributed profits over the most recent three years, up from 20 percent previously.

    The slumping market reflected a correction from previous highs, rising global financial uncertainty and concerns about the domestic economy, the CSRC said in a statement last month. It said China's unsound stock market exacerbated the situation.

    As weak sentiment made it harder for Chinese companies to raise money on the stock market, the government tried to boost the bond market as an alternative.

    The emergence of exchangeable bonds is part of the effort to improve the structure of the capital market and will help connect the equity and debt markets, according to the CSRC official.

    So far this year, about half of the value of refinancing efforts by listed companies represented bonds, which was progress in reducing reliance on the stock market, said the official. Previously, bonds accounted for only about 10 percent of corporate refinancing.

    As of the end of August, bond issues by listed companies totaled 152.5 billion yuan (22.3 billion U.S. dollars) since 2006,when the CSRC allowed such a practice, CSRC figures show.