According to a report in the South China Morning Post on October 29, a source close to the CSRC said that the launch, which was supposed to take place in November, was postponed because senior officials are worried that the practices would expose more investors to heavy losses.

One official was reported to have said the new trading mechanism was “temporarily on hold” and still awaiting further official approval. Other sources believe it could be a longer delay.

On October 30, though, China’s Xinhua news agency reported that the regulator’s work on margin trading and short selling was proceeding as normal.

Any potential delay would be unsurprising. The CSRC raised eyebrows when it first revealed its intention to implement short selling, since most other countries have been banning the practice.

But the launch would not have been an entirely new proposition by the PRC securities regulator. As early as 2006, China issued the Trial Measures for the Business of Margin Lending and Short Sale of Securities, which laid down the basic legal framework to govern those activities.

In April 2008, the State Council passed the Regulations for the Oversight of Securities Companies, which further paved the way for short selling to take place in the country.

Lawyers expect more rules to come out. “When the trial is finally implemented, the regulator will probably take a cautious approach and impose more restrictions in the initial stage,” said Fang Jian, partner of Linklaters in Shanghai.

This could happen in various forms. “Either separate rules would be issued, or conditions would be imposed when the regulators grant licences to securities firms,” Jian said.

The Trial Measures require 50% collateral for both fund borrowing and stock borrowing. Fang says that it is possible that the CSRC would require higher collateral thresholds to be set, perhaps raising the collateral to 100%, as mentioned in some press reports.

Eleven domestic brokerages have been chosen by the CSRC to participate in the margin lending and shorting trials. Citic Securities, Haitong Securities and Guotai Junan are three of the successful firms. The selection criteria which the CSRC adopted include net capital size, compliance record, and the companies’ plans for the test run. However, these securities companies are only allowed to use their own capital and securities in margin trading.

Taking a stance similar to that in Hong Kong, naked short selling will not be allowed in the PRC’s trial launch.