Chinese stocks will likely be on a roller-coaster ride this week as investors weigh the benefits of brokers' getting the green light to start financing businesses against jitters of a possible hike in interest rates.

The Shanghai Composite Index, which covers yuan-denominated A shares and hard-currency B chips, closed on Friday at 1,674.43, up 1.14 percent on a weekly basis.

Authorities will allow brokers to apply for licenses to lend money or securities for retail investors starting tomorrow. It's a step analysts said is closer to the set-up of a short-selling mechanism that can help boost liquidity.

The financing system, called "margin trading," will be piloted with first-tier brokerages with net assets of at least 1.2 billion yuan (US$150 million). The initial business scale will be capped to contain risks, according to the securities watchdog.

"It's a signal that the market will witness more cash flow, but volatility as well," said Wu Zhiguo, a Guohai Securities Co analyst. "We should regard it as positive news because regulators are striving to bring domestic markets in line with overseas counterparts."

Analysts said news that could spook sentiment includes escalating speculation the government will attempt to put a brake on the red-hot economy, which grew 11.3 percent in the second quarter, the fastest in a decade.

Benchmark lending rates were raised in April. Since then, the required deposits commercial banks must set aside were twice raised.

Ratings agency Standard & Poor's said in a report last week that more interest-rate hikes and monetary tightening are expected and there is a risk of "failure to manage the monetary environment."

Property and banking issues are expected to be battered if the central bank decides to push up loan rates to curb credit and scale down investments in fixed-assets.

(Shanghai Daily July 31, 2006)