China Expands Scope for Short Selling, Securities Journal Says

China Expands Scope for Short Selling
The Shanghai Composite. Photographer: Kevin Lee/Bloomberg

China will start a trial next week that will allow brokerages to borrow stocks for clients wishing to conduct short selling, the China Securities Journal reported.

Brokerages can also borrow money on behalf of clients for margin financing, the newspaper reported today, without saying where it got the information. Twenty-five securities companies will participate in the test, along with the stock exchange, fund management companies and China Securities Finance Co., which was set up as an agency to provide funds and stocks for brokerages’ short selling and margin trading. The journal is a publication affiliated with the official Xinhua News Agency.

“This will help brokerages to expand their margin financing and short selling businesses,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “With a system in place, brokerages now can borrow money and stocks from other financial institutions to meet clients’ needs.”

Guo Shuqing, who was appointed chairman of the China Securities Regulatory Commission in October, wants to expand the scope of brokerages’ businesses as part of his drive to bolster the nation’s stock market. China’s benchmark Shanghai Composite Index has climbed 6.9 percent in 2012 after slumping combined 33 percent over the past two years.

China broadened the securities eligible for margin trading and short sales in December to include stocks in the Shanghai Stock Exchange 180 Index and four open-ended exchange-traded funds including the China 50 ETF.

Eligible Brokerages

The securities regulator has approved 25 brokerages to start trials of margin trading and short selling since January 2010. Citic Securities Co., GF Securities Co. and Haitong Securities Co. are among the first batch to start the business.

Citic Securities, the biggest listed broker, rose 2.2 percent to 13.10 yuan at 10:53 a.m. in Shanghai, while Haitong gained 1.9 percent to 10 yuan. Short selling is the sale of borrowed shares with the hope of profiting when they fall. Previously, brokerages were only allowed to lend stocks on their own books.

China may allow brokerages to borrow as much as 90 billion yuan ($14.2 billion) to fund their margin trading and short selling, according to calculations based on the securities regulator’s proposal.

China Securities Finance would set aside 10 percent of its annual profit as reserves to hedge against operational losses, according to a draft posted on China Securities Regulatory Commission’s website in August last year. The ceiling for short-selling is 5 percent of a certain equity’s total market value, while the ceiling for margin trading is 10 percent, according to the draft.

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