China will soon allow margin trading and short selling of securities on a trial basis, the China Securities Regulatory Commission (CSRC) said Sunday.
"With the agreement of the cabinet, the CSRC will in the near future launch margin trading and short selling on a trial basis," the commission said in a statement on its website, without giving an exact start date.
The move, which comes at a time of renewed jitters in the financial sector thanks to the banking crisis in the United States, seemed designed to boost confidence in China's stock markets.
The benchmark Shanghai Composite Index closed at 2,293.78 on September 26, the last trading day before a week-long national holiday -- down by nearly two thirds from an all-time high recorded in October 2007.
In margin trading, investors borrow money from financial institutions to buy shares or other securities which they expect to rise in the future. If the share price does indeed go up, they can easily pay back the borrowed money.
Short selling is a similar operation, in which investors borrow shares to sell them on in the market, expecting the price to decline. If the price does fall, they can buy the shares at the lower price and return them to the lender.
Both types of transaction involve huge potential gain but also the risk of large losses, which is one reason why Chinese regulators have so far been cautious about introducing them on the country's roller-coaster market.