China has most of world’s biggest brokerages as deregulation, stock rally, merger prospect fuel upsurge

a person standing in front of a computer: An investor sits next to a stock quotation board at a brokerage office in Beijing. Photo: Reuters

An investor sits next to a stock quotation board at a brokerage office in Beijing. Photo: Reuters

China now boasts more of the world’s top investment banks than any other country, as a slew of reforms aimed at deregulating the sector, a surge in share prices and hope of industry consolidation send market capitalisations soaring.

Six of the 10 most valuable brokerages come from the Asian nation, with the US taking three spots in the ranking and Brasil having the remaining one, according to Bloomberg data. The six Chinese firms include Citic Securities and CSC Financial, which are ranked third and fourth place with a market cap of at least US$51.7 billion. Morgan Stanley and Goldman Sachs are still the biggest, capitalising at a minimum US$72.4 billion.

Traders have been betting on Chinese brokerages, a barometer of market sentiment. Stocks have rallied after China emerged from lockdown during the coronavirus outbreak. Regulators are allowing a wider daily trading band for stocks on the ChiNext in a sign of further relaxation. And investors are optimistic that more government-led mergers will be in the offing.

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China’s economic transition “will need more direct financing and brokerages will benefit from the rising status of the capital market,” said Zuo Xinran, an analyst at Founder Securities. “The sector is expected to maintain rapid profit growth in the second half and retain the investment values.”

Chinese brokerages are already benefiting from a stellar run on the nation’s US$9.6 trillion stock market this year, which has buoyed up the daily trading values close to the all-time high and leveraged stock purchases to their highest level in five years. The benchmark Shanghai Composite Index has gained 11 per cent so far this year, beating any world’s major equity gauge. It is also the only major benchmark that has not slipped into bear-market territory amid the Covid-19 pandemic.

The resilient stock performance has well been reflected in brokerages’ interim results. China’s 134 brokerages posted an average 25 per cent increase in first-half earnings, according to the Securities Association of China. Meanwhile, the companies on the Shanghai Composite probably reported a 21 per cent profit decrease in the same period, Bloomberg data showed.

The rosy trend continued into July. Twenty-seven publicly traded brokerages doubled the monthly earnings from a year earlier last month, with Citic Securities and Changjiang Securities taking the lead with an at least six-fold increases, according to separate exchange fillings.

Strong earnings put the sector’s valuation within a reasonable level for investment. A gauge of 25 mainland-traded brokerages is valued at an average of 1.8 times book values, compared with the multiple of 5.3 times seen in the run-up to a market rout in 2015, according to Bloomberg data.

Still, a big headwind facing the industry would be the emergence of new rivals that are backed by mega-banks. The China Securities Regulatory Commission (CSRC) did not deny media reports that widely circulated in June that banks would be awarded licenses to run broker businesses and it may begin with big state-owned lenders, whose outlets significantly outnumber those of securities firms.

The latest catalyst for brokerages stocks is a 20 per cent limit on daily movements that is being applied to growth companies on Shenzhen exchange’s ChiNext board starting Monday. The move doubles the previous cap on how much the stocks can rise or fall every day, which analysts said will boost liquidity and trading activities to eventually lift the valuation of brokerages.

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The ChiNext board, which accommodates more than 800 smaller companies, will be revamped into a venue to host more hi-tech companies in the technology hub of Shenzhen after trading restrictions are loosened and coming initial public offerings (IPO) are floated under the market-based registration system.

“With the implementation of capital market reforms and favourable policies, brokerages’ fundamentals are expected to keep improving,” said Lan Xiaofei, an analyst at BOC International.

Citic Securities and CSC Financial may be the biggest beneficiaries of the reforms, as the two have 29 and 27 reserved IPOs that are seeking listings on the ChiNext respectively, the most among the industry, according to the analyst.

Citic Securities, in which conglomerate Citic Group has the biggest stake, is valued at US$54.7 billion after rising 26 per cent in Shanghai. CSC Financial, which is owned by the Beijing government, has a market cap of US$51.7 billion, with its Shanghai-traded shares surging 77 per cent.

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Part of the upside on CSC Financial has been spurred by mounting speculation that it will merger with Citic Securities, which the company denied in an exchange filing this month. CSC also warned investors against trading its stocks, saying the shares were almost four times as expensive as the industry average on the price-to-book ratio basis.

This was not the only bet placed by traders that a consolidation will happen in the brokerage sector. Days later, First Capital Securities, a Guangdong province-based brokerage, had to issue a clarification statement to deny its reported merger with Capital Securities after the shares surged. Beijing Capital Group, a government-owned conglomerate whose business spans from real estates to finance and infrastructure, is the biggest shareholder of both First Capital Securities and Capital Securities.

Stoking the merger speculation was the comment last year by the securities regulator that it wanted to create “aircraft carrier-sized” investment banks to expand the international business of Chinese brokerages.

Regulators are also gradually easing the industry restrictions by loosening the firewalls between brokerages and other financial institutions. Securities firms will probably be soon allowed to leverage on the online platforms of affiliated banks and insurers to promote broker business, according to a new rule issued by the regulator this month to seek public comment. That is a U-turn from the heightened surveillance after the leverage-fuelled stock bubble burst in 2015.

“There’s still room for brokerage firms to boost earnings, with the continuing improvement in the capital market,” said Zhang Yicong, an analyst at Wanlian Securities. “Market sentiment will keep up, as more reform signals are released and monetary policies generally remain loose.”

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This article originally appeared on the South China Morning Post (, the leading news media reporting on China and Asia.

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