By staff reporter Qiao Xiaohui

A pilot project that would allow Chinese security firms to offer stock and margin lending to established clients is expected to be issued soon, a source familiar with the situation told Caijing. The aim of the new measure would be to boost the country’s struggling stock market.

An initial outline of the project was issued by the State Council, China’s cabinet, in late April. Now, according to a source close to China Securities Regulatory Commission (CSRC), a new set of guidelines will be released within the week, and selected firms are expected to start operation by December. The new guidelines are said to contain the criteria by which candidates will be approved for stock and margin lending, as well as other details of the pilot.  

Those fine points were discussed October 8 at a meeting in the Beijing suburb of Xiangshan. In attendance were senior executives from 11 Chinese securities firms and officials from the CSRC as well as the Shanghai and Shenzhen stock exchanges. Firms invited to the meeting are believed to be likely candidates for the project.

The source disclosed that after the official guidelines are issued, securities firms who get the approval of their board could send stock and margin lending application materials to the CSRC for review. A technical testing on selected brokers’ trading system would then be conducted by exchanges and China Securities Depository and Clearing Co., Ltd. The entire procedure would take about one-and-a-half months. Hence, it is feasible some firms may begin stock and margin lending as early as December. 

However, one participant at the October 8 meeting said that a fast-track program for implementing stock and margin lending could be expected if the A-share market index continues to fall.

The securities firm Haitong said earlier that 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 the creation of financial vehicles that may reduce and diversify risks, it can also create risks by encouraging speculation and volatility.