SHANGHAI China will allow a handful of brokerages to borrow shares from institutional investors for use in short selling from February 28, the official China Securities Journal reported on Saturday, as regulators move cautiously to develop domestic derivatives markets.
A group of 11 brokerages will be able to borrow shares in a pre-qualified pool of 90 listed "blue-chip" companies, the report said, citing information received from the state-owned China Securities Finance Corporation that services the pilot program.
The 90 stocks available for borrowing represent 9.3 trillion yuan ($1.49 trillion) in tradable capitalization, nearly 50 percent of China's A-share market.
The pilot project was originally launched in August 2012 during a sustained collapse in mainland equity indexes, but its first phase was limited to allowing brokerages to borrow money, not shares, from institutional investors.
Allowing brokerages to borrow shares directly will allow them, in theory, to tap into the massive pool of shares held passively by Chinese state-owned enterprises.
Regulators will closely manage the program, the report said, quoting unnamed experts who predicted the impact of the initiative will be market neutral.
The report said the initial amount of stocks to be borrowed is likely to total around 510 million yuan, a tiny fraction of China's stock market capitalization.
Regulations also dictate the interest rates lenders can charge and the period for which loans can be borrowed.
Qualified brokerages will be able to borrow shares for fixed periods ranging between three days to 182 days, with lending rates fixed from 1.5 percent for the three-day tenor up to 3.5 percent for the 182-day tenor, the report said.
A foreign short seller who spoke on condition of anonymity said that by excluding small cap companies from short selling, Chinese regulations limit the beneficial impact short selling can exert on markets, specifically their ability to expose corporate governance problems at young companies.
The brokerages the article said were participating in the program included CITIC Securities Co Ltd (600030.SS), Everbright Securities Co Ltd (601788.SS), GF Securities Co Ltd (000776.SZ), Guotai Junan Securities Co Ltd, Haitong Securities Co Ltd (600837.SS), Huatai Securities Co Ltd (601688.SS), Shengyin Wanguo Securities Co Ltd, China Merchants Securities Co Ltd (600999.SS), Galaxy Securities Co Ltd and China Securities Co Ltd.
(Reporting by Pete Sweeney and Samuel Shen; Editing by Daniel Magnowski)