Oct. 17 (Bloomberg) -- Citic Securities Co. and three other brokerages may be allowed to offer loans for stock purchases as China's government seeks to bolster the market after the benchmark index slumped 66 percent this year.

Haitong Securities Co., Guotai Junan Securities Co. and Everbright Securities Co. may also start margin trading as early as mid-November under a pilot program by the securities regulator, an official with knowledge of the matter said, declining to be identified because the information isn't public.

The China Securities Regulatory Commission aims to lure investors and expand the nation's capital market as slumping stock values erode trading. Brokerages may earn 6.6 billion yuan ($966 million) of interest income from margin trading and short selling next year, the Shanghai Securities Journal reported Oct. 6, citing an estimate from Haitong.

``Margin trading will enable securities companies to increase their income sources,'' said Liang Jing, a Shanghai- based analyst at Guotai Junan Securities. ``Lending cash and earning interest income should add about 8 to 10 percent profit for Haitong and Citic.''

Haitong rose 3.7 percent to 18.86 yuan as of 2:11 p.m. in Shanghai trading and Citic gained 3.3 percent to 18.90 yuan. Guotai Junan and Everbright are privately held.

Raymond Tang, a spokesman for Citic, and Guotai Junan spokeswoman Jin Yi declined to comment. Spokeswomen Sun Tao of Haitong and Wang Jiaojiao of Everbright weren't immediately available to comment.

Financial Innovation

The CSRC on Oct. 5 said it would soon allow margin trading and short selling, initially driving shares of Haitong, the country's largest brokerage by market value, and other securities firms higher on optimism the initiative would boost profits.

Brokerages in China are currently doing system testing and conducting mock tests for margin trading, Shang Fulin, chairman of the CSRC, said today in Beijing. He didn't identify any firms.

At a conference in the Chinese capital today, Shang urged banks to avoid the kind of financial innovation that caused Wall Street to unravel this year under the weight of writedowns of mortgage-backed securities.

``We must pay attention to the risks involved when we pursue financial innovations,'' Shang said. ``China will study the links between innovation and risks from the financial crisis and the fundamental reason that caused the crisis.''

Supporting Market

The regulator has also warned companies licensed to trade in overseas futures markets to avoid speculation and limit themselves to legitimate hedging, the Wall Street Journal reported, citing Jiang Yang, assistant to the CSRC chairman.

China, which clamped down on unauthorized margin trading in 1997 and 2001, has scrapped the tax on stock purchases and relaxed company buyback rules to help support Asia's worst- performing benchmark stock index this year. The CSI 300 Index has tumbled 66 percent since Jan. 1 as an equities bubble burst.

Brokerages are required to have more than three years of trading experience and the highest rating awarded by the Securities Association of China, which is overseen by the CSRC, to receive approval for margin trading, according to rules published by the nation's two stock exchanges in 2006.

Securities firms that qualify can lend investors cash and stocks, earning commissions and interest income. Investors are allowed to borrow up to twice the amount of margin, and use the cash to buy stocks, according to the 2006 rules.

Rebound Predicted

Investors can also short sell selected stocks that they borrow from the brokerages, betting they will be able to buy them back at a lower price and profit from the difference.

The Shanghai and Shenzhen bourses will publish a list of stocks that can be loaned to investors, according to the official. The stocks would be selected from companies that have been traded on the exchanges for more than three months and have a market capitalization of at least 800 million yuan.

The Shanghai Composite Index will climb 88 percent in the next 12 months as government measures to bolster economic growth take effect, Guotai Junan strategist Zhang Xiuqi said today.

``The plunge in stock values this year has more than priced in a slowdown in China's economy and the impact of the global crisis,'' Zhang said in a telephone interview, calling his forecast ``conservative.'' He recommends investors favor bank, telecommunications and drug stocks.

To contact the reporter on this story: Zhao Yidi in Beijing at at yzhao7@bloomberg.net

Last Updated: October 17, 2008 02:18 EDT