In the past year, the China Securities Regulatory Commission has been encouraging companies to set aside a minimum of 30 per cent of their profits as dividends.

In May, it said it would take administrative measures to punish profitable firms that did not distribute dividends.

"The dividends paid to investors are not sustainable, stable and are short of investors' expectations," the Shanghai exchange said in a statement.

Between 2009 and 2011, 347 companies, or 40 per cent of the listed firms in Shanghai, distributed dividends. The exchange said the payouts were not enough to attract investors to buy shares.

Analysts said the exchange's new step signalled the regulator would impose harsher measures to force listed firms to share at least 30 per cent of their profits with investors.

"The exchange's new rule is definitely helpful," said Guotai Junan Securities analyst Shi Weixiang.

"The exchange is widely expected to do more in future to buoy the market."

The mainland stock market has been in a bearish mode since 2010, with the regulator repeatedly trying to breathe life into it.

By increasing their investment returns, higher dividend payouts could woo back investors who have turned away from the market.

In November, Beijing reformed the dividend tax regime to encourage long-term equity investments.

Under the new tax system, investors who hold stocks for more than one year will pay only a 5 per cent dividend tax, compared with 10 per cent previously.

The Shanghai exchange is also studying a plan to allow hedge funds to list on the market, a move that could help the funds raise more cash to buy shares.

The CSRC has suspended initial public offerings since October to avert fresh equity supply that could drain the market.

All these measures have, however, failed to spark a buying spree among retail investors, who are worried about worsening corporate earnings.

The Shanghai market closed 0.41 per cent lower yesterday. It has been among the world's worst performers in the past three years.