SHANGHAI, (Reuters) –China has authorized its insurance companies to participate in securities lending. This could boost short-selling in China’s bond and stock markets.

Chinese mutual funds, brokers, and banks are already able to conduct business in China, such that they can lend securities holdings out to other market participants, including short-sellers, who will receive interest income.

China Banking and Insurance Regulatory Commission, (CBIRC), published guidelines on Friday that allow insurers to take part in securities lending.

CBIRC released a statement saying that this move may help insurance companies improve their returns on long-term and large stock and bond holdings.

CBIRC also stated that the measures could “help improve market liquidity, vibrancy,”

Sources indicate that Chinese insurers had 11.6 trillion yuan in bonds, stocks, and securities funds as of the October 31st.

Yuan Yuwei is a Water Wisdom Asset Management hedge fund manager. He said that improving China’s short selling mechanism would reduce market volatility and bring the market prices for securities closer to its intrinsic value.

He said that it will reduce market bubbles and create additional income for insurance companies.

China demanded that short-selling activity be stopped during 2015 stock market crashes.

Despite China’s gradual relaxation of short-selling regulations over the years, securities lending remains small.

Official data shows that the outstanding value of securities loans was at 149.8 Billion Yuan ($23.51 Billion) by October. This is less than 9 percent of outstanding margin loan value.

CBIRC announced Friday that worldwide securities lending totalled 2.33 trillion euros (or $2.60 trillion). This business was normal to enhance secondary market liquidity.

CBIRC published rules Friday setting the threshold of eligibility for the business and asking insurers to improve risk control when lending securities.

($1 = 6.3718 renminbi)

($1 = 0.8861 euros)