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China Expands Short-Selling Program by Admitting More Brokerages

China is expanding a program that facilitates the ability of brokerages to lend stocks to clients for short-selling, as regulators seek to promote new services on the country’s financial markets.

Changjiang Securities Co., Founder Securities Co. (601901) and Hong Yuan Securities Co. (000562) are among 19 securities companies that will be allowed from tomorrow to borrow shares from China Securities Finance Corp. and re-lend them to clients, the state-backed agency said in a statement on its website today. They’ll join 11 brokerages, including Citic Securities Co. (600030) and Haitong Securities Co. (600837), already able to borrow from the agency.

Gaining the right to borrow shares from China Securities Finance expands a revenue stream for the brokerages, which have seen income from underwriting share sales dry up amid a crackdown on misconduct that’s halted initial public offerings since mid-October. Short selling is one of the measures that will support development of the country’s financial markets, the the nation’s securities regulator said last month.

Short sellers borrow shares that they then sell, betting they can buy back the stock later at a lower price and profit from the difference.

China Securities Finance also expanded the list of shares it allows brokerages to borrow from 87 to 287, according to a separate statement. The agency was established in 2011 to lend money and securities to brokerages to facilitate margin trading and short selling.

The Shanghai and Shenzhen stock exchanges this month expanded the overall list of stocks investors can short to 700.

Earnings Driver

The outstanding value of margin and short-selling trade on domestic stock markets grew 2.5 times in the first half to 222.2 billion yuan ($36.3 billion) at the end of June, according to Tebon Securities Co. That helped drive net income at publicly traded brokerages up 11 percent in the first six months, while profit from stock and bond underwriting dropped 37 percent, according to Tebon.

China’s brokerages in 2009-2011 got about 70 percent of their investment banking revenue from underwriting new stock offerings, according to Shenyin & Wanguo Securities Co. The China Securities Regulatory Commission has halted new listings as it drafts new rules to combat fraud.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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