China allows margin financing for brokerages

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China introduced a new pilot trading scheme to stock exchanges on Thursday, allowing margin financing and stock lending for brokerages in a bid to release new funds into the market after shares dropped to the lowest levels since February 2009.

Under the pilot program, brokerage firms are permitted to borrow money and stocks from banks, funds and insurers, and re-lend them to their clients for margin trading and short-selling business.

As the first step, the program currently involves only margin trading by 11 brokerage houses including Guotai Junan Securities and Galaxy Securities, but it will eventually be expanded to include securities lending to facilitate short selling later when players become more familiar with the new business.

A maximum of 120 billion yuan (18.92 billion) of fresh liquidity is expected to be pumped into two bourses in Shanghai and Shenzhen, where the combined daily turnover stands at around 100 billion yuan.

The program could help brokerage firms expand their existing margin trading businesses and let investors profit from either increases or declines in share prices.

The benchmark Shanghai Composite Index narrowed its losses to 0.03 percent from 0.34 percent in the morning session to close at 2,052.59 after it tumbled to a three-year low of 2,053.24 points on Wednesday.

The Shenzhen Component Index also pared losses to 0.61 percent from 1 percent at midday to close at 8,220.08.

Yang Ling, president of the Beijing-based hedge fund StarRock Investment Management Co., Ltd., said the introduction of the program would boost trading vitality in the market but was likely to decide what direction the index may head.

"Short selling shares right now becomes very dangerous as the market value is at its bottom at the current stage," Yang said.

Potentially, the program could help those long-term investors find other sources besides dividends from shares they buy and hold for a long time, just waiting for the prices to rise.

"If we lend our stocks to those short sellers at an annual yield of 7 percent for, say, Kweichow Moutai Co., we could earn our principal in 10 years," said Dan Bin, chairman of OHIM Corp., a long-term investor of the liquor maker.

"During such a process, we could still enjoy returns from dividends and the growth of the company, It will be a win-win situation," he said.

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