Beijing will expand a trial scheme for margin trading and short selling by establishing a third-party company that offers intermediary services for brokerages to borrow cash and equities from other institutions.
China Securities Finance, the intermediary firm, has a registered capital of 6 billion yuan (HK$7.3 billion) and could help increase the intermediary business nearly threefold.
That would provide a much-needed boost to troubled mainland brokerages as they fall victim to a market downturn.
The firm's shareholders include the Shanghai and Shenzhen stock exchanges, and the China Securities Depository and Clearing.
China Securities Finance is likely to be operational before the end of the year after it was registered last week with the State Administration for Industry and Commerce.
The China Securities Regulatory Commission gave its blessing to the new trading mechanism in March last year, allowing six brokerages to conduct margin-trading and short- selling businesses under a pilot scheme.
In margin trading, investors can borrow money from brokerages to buy stocks, while short selling enables them to sell securities they borrow and buy them back later to square their trades.
The regulator began studying moves to expand the businesses in the second half of last year, mulling over a plan to set up an intermediary firm that could borrow money and equities from other institutions - including banks, insurers, pension funds and mutual funds - before lending them to brokerages for margin trading and short selling.
The State-owned China Securities Journal reported that China Securities Finance would be allowed to borrow up to 90 billion yuan worth of cash and stocks to support the brokerages' services.
As of Monday, the outstanding value of margin trading and short selling on the Shanghai and Shenzhen stock exchanges stood at 33.2 billion yuan.
The efforts to expand margin trading and short selling come as mainland brokerages report a plunge in earnings.
Three of the brokerages that are listed posted profit declines of at least 56 per cent, or made losses, in the three months from July to September as the Shanghai Composite Index fell 14.6 per cent.
'The regulator is obviously aiming to bolster the brokerages,' said Wu Kan, a Dazhong Insurance fund manager. However, Wu said: 'The expanded margin trading and short selling will have a limited impact on the market.'