The new regulatory guidance on banks' preferred shares removed a prerequisite for banks to publicly sell shares on the over-the-counter market before they can sell preferred shares to raise capital, which was a hurdle for some banks in the past.

The change will mainly impact smaller lenders, such as city and rural commercial banks, as the majority of them are unlisted, the regulator, the China Banking and Insurance Regulatory Commission, said in a statement.

"The revised rules cleared the hurdles for the issuance of preferred shares of non-listed banks... and is conducive to secure the credit supply from small and medium-sized banks," it said.

Smaller banks extend a crucial lifeline for the private sector and small businesses, the plank of the economy, it added.

Chinese banks are facing pressure to raise funds after the banking regulator began phasing in stricter capital adequacy requirements in recent years to be in line with global rules on bank capital known as Basel III.

"The pressure of capital replenishment on commercial lenders is relatively big," said Wen Bin, chief analyst with China Minsheng Bank, citing capital consumed to write off surging bad loans, and to absorb off-balance sheet assets due to a campaign to defuse financial risks.

"Therefore banks need to replenish capital through external financing channels to improve their ability to resist risks and better serve the real economy."

Preferred shares are a widely used tools for large and listed Chinese banks to replenish tier-1 capital, yet regulatory hurdles prevent smaller lenders from raising capital via preferred shares smoothly, according to the commission said.

(Reporting by Cheng Leng, Shu Zhang and Beijing Monitoring Desk; Editing by Kim Coghill, Robert Birsel)