Chinese stocks surged to a two-year high on Monday after the government announced new rules that will allow investors to borrow from brokerages to buy and sell shares.

The benchmark Shanghai Composite Index gained 1.5 percent to 1,697.28, its highest close since it finished at 1,715.14 on April 13, 2004. The Shenzhen Composite Index rose 1.6 percent to 440.13.

The China Securities Regulatory Commission issued trial regulations Sunday outlining how approved brokerages can lend funds to their clients for the purchase of shares or lend stocks to them for sale.

The rules, to take effect Aug 1, underscore efforts to stimulate trading and develop China's capital markets, analysts said.

"The rules will have an important role in stabilizing the stock market and reducing volatility in stock prices," said Xu Yinghui, an analyst at Guotai Junan Securities.

Brokerages rose as investors expect the new services to increase their earnings.

CITIC Securities soared 8.6 percent to 17.20 yuan and Hong Yuan Securities jumped 4.9 percent to 9.38 yuan.

Banks also rose on optimism over the trading debut Wednesday of Bank of China's yuan-denominated shares, or "A shares," in Shanghai. The bank, China's second largest lender, raised a record 20 billion yuan (US$2.5 billion; euro2 billion) in its initial public offering.

"Investors have reached a consensus that BOC's A shares will rise 10 percent-15 percent on Wednesday," said Chen Jinren, an analyst at Huatai Securities.

Shenzhen Development Bank gained 7.1 percent to 8.10, Hua Xia Bank added 7.1 percent to 4.83 and Minsheng Banking rose 4.1 percent to 4.55.

Meanwhile, in currency dealings the yuan fell against the U.S. dollar.

On the over-the-counter market the dollar was at 7.9953 around 0730 GMT, up from Friday's close of 7.9943. It traded between 7.9962 and 7.9915, the lowest point the dollar has traded against the yuan since the current trading system began almost a year ago.

The dollar closed at 7.9946 on the automatic price matching system, dealers said. It ended at 7.9920 on Friday.

The dollar-yuan "parity rate" announced early Monday was set at 7.9924, its lowest level ever, after the dollar weakened Friday on international markets.