April 17, 2015 / 10:36 AM / 4 years ago

UPDATE 1-China allows fund managers to lend stocks for short-selling

* China allows fund managers to lend shares for short selling

* Will let investors short sell more types of stocks

* Margin financing growing but short selling lagging-regulators (Adds more details, markets)

By Samuel Shen and Pete Sweeney

SHANGHAI, April 17 (Reuters) - China on Friday allowed fund managers to lend shares for short-selling, and will also expand the number of stocks investors can short sell, in a bid to raise the supply of securities in the market.

Investors now face difficulties borrowing stocks for sale, even with some companies trading at lofty valuations.

China’s shares posted seven weeks of gains, reaching seven-year highs on Friday, as retail investors rushed to open stock accounts and borrow a record amount of money to buy shares, pushing trading turnover to record highs.

Institutional investors including mutual fund companies and asset management businesses of securities firms are encouraged to lend stocks because the “margin financing business has been growing rapidly, but the business of short-selling has been developing slowly,” the Shanghai and Shenzhen stock exchanges said in a statement.

Friday’s announcement, also issued by the Securities Association of China, comes a day after the launch of two stock index futures <0#CIH:> <0#CIC:> that provide investors with new tools to hedge against risks.

“This is a combination of actions that is negative to the stock market,” said Shen Zhengyang, Shanghai-based analyst at Northeast Securities.

“With index futures to hedge against risks, institutions would be willing to lend stocks for interest income.”

Shen added that a correction in Chinese stocks “is unavoidable”, given the rich valuations of some stocks.

The type of stocks that investors can short sell will also be expanded soon to 1,100, from 900 currently.

At a new conference in Beijing, China’s securities regulator warned investors to be cautious of market risks.

“Some investors have insufficient understanding and alertness of market risks,” Deng Ge, spokesman of the China Securities Regulatory Commission said. “I want to remind retail investors: invest rationally, and always treat the market with awe.” (Reporting by Samuel Shen and Pete Sweeney; Editing by Jacqueline Wong)

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