china securities
New regulations to expand margin trading to be come into effect on 18 September. (Reuters) Reuters

China has given the greenlight to expand margin trading and short selling in the equity markets in a bid to ramp up investor activity in the sector.

Following the announcement, the China Securities Finance Corporation (CSF) nearly tripled the number of brokerages and stocks participating in the pilot programme.

The CSF is an incorporated financial institution, authorised by market regulator China Securities Regulatory Commission (CSRC), which aims to facilitate the margin transactions of brokerages by providing them loans. It now has a registered capital of 12bn yuan (€1.5bn, $2bn, £1.2bn), with shareholders as Shanghai Stock Exchange, Shenzhen Stock Exchange, China Securities Depository and Clearing Corporation, Shanghai Futures Exchange, China Financial Futures Exchange, Dalian Commodity Exchange, and Zhengzhou Commodity Exchange.

In its latest move, the CSF increased the number of brokerages it would finance to 30 from 11. They will be allowed margin trading and short selling for 287 stocks, representing 64.3% of the Chinese A-share market's capitalisation. Previously, the semi-governmental agency allowed margin trading and short selling for 87 stocks.

The changes will become effective from 18 September, the agency said on its website.

Short selling is a practice in which a trader sells a security that he/she does not own, borrowing it from a broker. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short, generating a profit.

In margin trading, a trader buys stocks without having the entire money to do it, primarily funded by the broker and the rest by the trader.

These are trading methods in securities markets that ensure participation by investors, who lack sufficient money to conduct trading.

Increasing Investor Base

The world's third-largest economy is looking to widen the investor base in securities markets with new regulations, by providing more liquidity. More investor participation means improved price discovery in stock markets.

As at the end of August, there were 2.1 million margin accounts in the country, up from 1.9 million in July, according to the CSF.

Nevertheless, the regulators are exercising caution to prevent malpractices in the securities markets. Brokerages can only trade highly liquid stocks in profitable companies on margin.

The new regulations come amid concerns that Chinese investors are shunning equities and opting to invest in real estate and other high-yield wealth management products.