China announced a plan today to allow state-owned companies to trade a larger percentage of their shares on China's two small stock markets, thereby diluting government ownership of many firms.

But Zheng Silin, a deputy director of the State Economic and Trade Commission, said such a plan would have to proceed "prudently," because if done too quickly China's stock markets in Shenzhen and Shanghai would crash.

Zheng's announcement, made at a news conference about efforts to reform China's state-owned industries, is the latest indication that China is attempting to resume the difficult process of restructuring its massive, moribund state sector. Reforms in this area have been stymied for almost a year because of concerns about stability and unemployment. But in recent months, government officials and economists have said that reforms must be carried out because unemployment is rising anyway.

Zheng's statement is in line with recent articles in China's state-run press saying the state-owned percentage of many of China's companies can be diluted to well below 50 percent. In some cases, the state will opt for simply a controlling share of the stock. In other cases, the state will either get out of the industry altogether or hold only a tiny percentage of the stock.

Currently, the state keeps ownership of strategic industries by limiting the percentage of shares that can be traded to 30 percent. The remaining 70 percent must be retained by the enterprise and state institutions.

Zheng said today that "theoretically there is nothing wrong with trading state-owned shares" -- a change from previous policy.

China has made this change, economists said, because it has started to look at its small equity markets again as a source of much-needed capital to help its state-run firms out of difficult financial straits. Only a few of China's 16,874 large and medium-size companies make any profit. Approximately 900 companies are listed on China's two exchanges. Over the past two months, the Chinese government has encouraged individual investors to pump money into the stock market, hoping that would stimulate growth.

Zheng's announcement that the government is now willing to consider cutting the state's interest in many of these firms is a further indication that China wants to embrace market practices.

Still, he said, China needs to move slowly with this plan.

"We have to be very cautious in getting state-owned shares listed, because the amount of state-owned shares is much bigger than the amount of shares now circulating on the market," he said. "If people are not cautious enough, there will be very large fluctuations in the stock market."