Preference shares, prescription for ailing China stock market?

China launched a pilot program on Friday allowing eligible listed and unlisted public companies to issue preference shares, sending key stock indices up by around 3 percent.

"The trial is significant in deepening reform in the capital market," said Zhang Xiaojun, spokesman of the China Securities Regulatory Commission (CSRC) at regular weekly press conference.

Analysts believe the move will open up additional financing channels for Chinese companies and provide more investment instruments to investors, but it is still far from saving the ailing market.

Preference shares, along with common shares are the two primary types of stocks that companies offer to investors. Preference share holders have priority rights over ordinary share holders in relation to distribution of profits and residual assets.

Unlike common shares, preference shares are more like a bond. They are rated by major credit-rating companies and their prices are affected by changes in interest rates.

According to the CSRC, the face value of one preference share in China is set at 100 yuan (16.2 U.S. dollars).

A listed company refers to one listed on a stock exchange. An unlisted public company is one that is not listed but has either issued or transferred shares to more than 200 shareholders.

According to the CSRC, three kinds of listed companies are eligible to issue preference shares, including some blue chips, companies with merger and acquisition plans, and those which perform a common share buyback to lower registered capital.

Stock market commentator Ai Tangming said the scope for eligible companies was wider than he expected, indicating that the state regulator is eager to release reform dividends to boost the capital market.

Blue chips in China are all index heavyweights, said Ai. More mergers and acquisitions will push up share prices of companies involved, he added.

A share buyback is believed to reduce the number of shares outstanding on the market and increase share prices, said analysts.

Franklin Templeton Sealand Fund Management said the reform initiative gives Chinese companies a new financing instrument. By directly replenishing tier-one capital, these companies will have less financing pressure in the secondary market. In this way, they are expected to have a better stock valuation.

Investors widely predicted banking shares will be included first in the program. Banks rose across the board on Friday with the Industrial and Commercial Bank of China, the nation's largest state-owned lender, rising 1.83 percent, and China Construction Bank, the second largest, up 2.38 percent. The index tracking the banking sector jumped 4.39 percent.

Ai Tangming expected to see more companies included in the program soon, then the state regulator can expand the program to all listed companies after summing up results from the trials.

He said there is a lot more to do to prop up the country's stock market, which is crippled with problems. A healthy market that offers long-term investment options and stable dividends is what the country is after.