China may allow brokerages to borrow as much as 90 billion yuan ($14.2 billion) to fund their margin trading and short selling, according to calculations based on the securities regulator’s proposal for an agency to manage the business.

China Securities Finance Co. would set aside 10 percent of its annual profit as reserves to hedge against operational losses, according to a draft posted on China Securities Regulatory Commission’s website on August 19. The ceiling for short-selling is 5 percent of a certain equity’s total market value, while the ceiling for margin trading is 10 percent, according to the draft.

China Securities Finance may also borrow long-term subordinate bonds from investors, which can be up to 50 percent of the company’s registered capital, to boost its capital, according to the draft. The Chinese Securities Journal reported the amount brokers may borrow earlier today.

Smaller brokerages can’t do short-selling in China as they don’t have many shares on hand, said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. With the new depository agency, they will be able to borrow shares and lend to customers, he said.

Lai Haifeng, an analyst at Guoyuan Securities Co. in Shanghai, said yesterday that the expansion in margin selling and short selling would boost the earnings of brokerages.

China is aiming to expand its derivatives market, as less than 1 percent of total trading volume is conducted on margin trading, compared with up to 20 percent in “mature” markets, fund information company Z-Ben Advisors said in a report today.