First State Cinda Fund Management, a joint venture between non-performing loan disposer Cinda Asset Management and Commonwealth Bank of Australia subsidiary First State Investments, and China Universal Asset Management were also approved, according to Reuters, which cited regulatory sources.

The Shanghai-Shenzhen 300 Index, which follows the largest yuan-denominated A shares on the two exchanges, rose 2.32 per cent to 2,369.79 points.

The Shanghai Composite Index, which tracks A shares and US dollar-denominated B shares, jumped 1.51 per cent to 2,716.18 points, while the Shenzhen Composite Index rose 1.88 per cent to end at 666.96 points.

The China Securities Regulatory Commission informally suspended the launch of new mutual funds in December over fears that large inflows from retail investors were creating the conditions for a bubble.

Mutual funds raised more than 400 billion yuan last year as wary retail investors chose to move some of their bank deposit savings to professional fund managers rather than invest directly in stocks. More than 150 billion yuan of that entered funds in November and December.

'That amount was unsustainable,' HSBC regional equity strategist Steven Sun said. 'We estimate 200 billion to 250 billion yuan a year is sustainable.'

There are now more than 320 mutual funds, with 90 per cent of them dedicated or partially dedicated to investing in stocks.

In December last year, Harvest Fund Management raised 40 billion yuan from almost a million investors in just one day.

The Shanghai Composite Index rose 130 per cent last year, with most of the gains coming in the last few months as investors regained their confidence and stampeded back into equities after a four-year bear market.

Stock prices underwent a correction last week, dropping more than 11 per cent in Shanghai and 9 per cent in Shenzhen by the close of trade on Monday.

'It is clearly not in the CSRC's interests to see the market crash,' Mr Sun said.

'By resuming mutual fund approvals, it is showing it has taken notice of last week's correction and is easing off on administrative measures to cool the market.'

The five mutual funds approved have been waiting since December for the clearance to launch and there are more than 20 other funds waiting in line.

Sources said it was unlikely any other funds would be approved before the Lunar New Year holiday.

In addition to the suspension of new mutual funds, a number of large fund management companies have temporarily suspended subscriptions to their largest and most popular existing funds in a move they say is aimed at protecting investors' interests.

Some analysts believe the suspension was ordered by the market regulator.