By staff reporters Fan Junli and Qiao Xiaohui

Chinese market regulators have moved a step closer to launching a pilot project that would let select security firms offer stock and margin lending to established clients.

Pilot details were discussed October 8 at a meeting in the Beijing suburb of Xiangshan. Attending were senior executives from 11 Chinese securities firms and officials from the China Security Regulatory Commission as well as the Shanghai and Shenzhen stock exchanges.

Firms invited to the meeting are likely candidates for the project for which the State Council, China’s cabinet, issued guidelines in late April.

Attendees included executives from the country’s largest securities firms, such as Shenyin Wanguo Securities Chairman Ding Guorong, Haitong Securities Chairman Li Mingshan, Hutai Securities Chairman Wu Wanshan, and Dongfang Securities Chairman Wang Yimin.

Neither a timetable for the project nor details of the meeting were released to the public.

However, a meeting participant who spoke on condition of anonymity said afterward that a fast track for implementing stock and margin lending could be expected if the A-share market index continues to fall.

Separately, a securities firm senior executive who asked to remain anonymous said the meeting addressed concerns raised by small brokers who fear they may lose clients if only big brokers are allowed to participate in the pilot.

Citing risk control as a priority, the State Council’s guidelines call for regulators to qualify only top securities firms. Smaller brokers would be barred because of a requirement that participants have at least 5 billion yuan in net assets. But some observers say certain big firms may lack necessary tools for high risk management.

Another aspect of the guidelines under discussion is a rule that each security firm offer stock and margin lending only to existing customers who’ve been in their client base for at least 18 months.

Project hopeful Haitong said stock and margin lending could yield earnings of 6.6 billion yuan for the underwriting industry. Interest income is expected to replace commissions as a primary source of profit.

Nevertheless, experts note that stock and margin lending can be a double-edged sword. Although the practice encourages creation of financial vehicles that may reduce and diversify risks, it also can create risks by encouraging speculation and volatility.

If share prices decline to certain levels, for example, the lending system can foster panic as investors dump shares to meet lender demands for immediate loan settlements through so-called margin calls.

1 yuan = 14 U.S. cents