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China plans to allow margin trading, short selling

China plans to let investors buy shares using borrowed money and speculate on price declines by selling stock they don't own for the first time, to tap the nation's US$4 trillion in bank deposits and boost trading.

The China Securities Regulatory Commission may select five brokerages to start margin financing and short-selling services this year, according to a draft plan sent to the Shanghai and Shenzhen stock exchanges. The pilot program may be expanded to other companies later, it said.

"The move will inject lifeblood into the stock market," said Qiu Zhicheng, an analyst at Haitong Securities Co (海通證券) in Shang-hai. "It will alleviate concern that the market will be weighed down by listings of big companies."

The changes may generate income for brokerages and boost funds available for investment, as the government prepares to end a yearlong ban on public share sales, paving the way for offerings by companies including Air China Ltd (中國航空).

An investor buying on margin pays only a percentage of the cost of the stock, with the brokerage financing the rest through a loan. In short sales, investors sell stock they have borrowed in anticipation they can buy it back later at a lower price and profit from the difference.

China halted share sales last May to avoid a flood of equity, as companies pursued plans to make more than US$200 billion of mostly state-owned stock tradable. China's securities regulator yesterday said it would soon end the ban, after the program was implemented without causing a market slump.

The Shanghai composite index has risen 36 percent from its July 11 low, and the Shenzhen composite index has jumped 46 percent since July 18.

The government will initially allow companies to sell shares through placements, then by public sales of additional shares and lastly initial offerings, the regulator said.

Air China, the nation's No. 1 airline, and Aluminum Corp of China Ltd (中國鋁業), the world's second-biggest aluminum producer, are among companies that have said they aim to sell shares domestically.

The regulator plans to set up a company, called China Securities Finance Co, this year to provide loans for brokerages to finance margin trading, the draft said. It also proposes to let brokerages borrow directly from banks to fund client subscriptions to initial public offerings.
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