Securities regulators have mapped out rules to pilot a program allowing securities brokerages to re-lend borrowed money and securities to finance margin trading.
The new move is set to further boost fledging yet fast-growing margin trading in the mainland's stock market, but could further pressure a market that is retreating toward the psychologically important level of 2000 points, analysts say.
The China Securities Regulatory Commission issued a notice on Monday allowing the Shanghai and Shenzhen stock exchanges to start the program, instructing them to choose the right time to launch it, initially on a trial basis.
Under the pilot, securities houses are allowed to re-lend money and securities borrowed from lenders, insurance companies and mutual funds to their clients in margin trading.
China Securities Finance Co has been set up, with registered capital of 12 billion yuan ($1.89 billion), to lend to the brokerages.
The first batch of 11 securities brokerages has got the green light to conduct re-lending business, according to Shanghai Securities News.
Margin trading was first introduced in China in 2010, when investors were allowed to conduct margin trading using their own stocks as collateral.
As of Aug 15, a total of 69 securities companies are able to conduct margin trading and the number of investors has reached 329,500, according to China Securities Finance Co.
The total volume of margin trading was around 1.59 trillion yuan, with 66.4 billion yuan currently being traded.
Margin trading is essential to build what regulators call a "comprehensive" stock market, as it allows short-selling for the first time in the world's second-biggest stock market by capitalization. Short-selling adds to market volatility but allows investors to profit in bear markets.
Wang Jianhui, chief economist with Southwest Securities Co Ltd, believes that the new measure will further boost the volume of margin trading.
"Investors will have more sources of funding and they will trade more, with more funds in hand," he said.
More short-selling could dampen any hopes of a market rebound in the short term.
The Shanghai Composite Index edged up 0.85 percent, or 17.45 points, to 2,073.15 points on Tuesday, after dropping 1.74 percent to a three-year low on Monday. The index is down 2.61 percent this month and 5.74 percent so far this year.
Zhang Zhaowei, a senior analyst with Huaan Securities Co Ltd, wrote in a research note that there is still room for declines.
"Economic growth has shown signs of rebounding in the short term, and the issuing of new shares and the freeing of restricted shares strains market liquidity," he wrote.
Shares of securities companies, however, benefited from the news. Guojin Securities Co Ltd jumped by about 6 percent, suggesting investors believed the new measure will boost industry profitability.
The sector slumped by more than 5 percent on Monday, as a massive amount of restricted shares hit the market.
gaochangxin@chinadaily.com.cn
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