China stock market

A price war among mainland China’s brokerages is growing as they rush to cut fees for securities trading

Lacklustre business this year has brought discounts to investors.

PUBLISHED : Thursday, 05 May, 2016, 10:46am
UPDATED : Thursday, 05 May, 2016, 12:23pm

A price war among the mainland’s brokerages is escalating as they rush to cut the fees charged on securities trading amid a slumbering stock market.

At the same time the securities regulator is drawing up new rules governing brokerage fees to ensure the long-term development of the securities sector.

The brokerages reported soaring growth in fees — their main source of revenue — last year despite millions of retail investors being left in the wake of a stock market rout.

But lacklustre business this year because of a weak market prompted them to offer huge discounts on securities trading fees in order to keep existing clients or attract new investors.

Nonetheless, Lan Rong, chairman of Industrial Securities, a mid-size brokerage on the mainland, said that the great changes taking place on the market would eventually prompt securities firms to diversify their businesses and accelerate their internationalisation.

“It’s an irreversible trend that the capital markets will play an increasingly important role in the mainland’s economic development,” he said. “Diversification and internationalisation are creating big opportunities. It boils down to the question of who will grasp the opportunities.”

Total turnover on the Shanghai and Shenzhen stock exchanges jumped more than threefold in 2015, to top 540 trillion yuan.

A buying euphoria occurred in the first half of 2015 as investors chased a strong rally, only to find that they get stuck with heavy paper losses following a boom-to-bust scenario in mid-June.

The market lost more than US$5 trillion of capitalisation between mid-June and late August.

Brokerage fees account for about half of mainland brokerages’ total sales.

They hit the jackpot when a rally attracted fresh capital inflows worth billions of yuan while struggling to maintain business growth during a weak market.

Lan said that a new growth driver should be created as brokerages seek to strengthen their competitiveness.

“If you look into the demands from high-net-worth investors who hope to allocate their assets around the globe, good opportunities abound,” he said. “It’s time to create an efficient platform for mainlanders to conduct cross-border trading.”

The China Securities Regulatory Commission (CSRC) has long been pushing securities firms to expand their businesses into margin trading and asset management.

According to brokerage sources, a new rule aimed at loosening regulation on securities trading fees is in the pipeline.

The CSRC is expected to let companies charge a fixed amount of brokerage fees on a monthly basis, regardless of a client’s total trading value.

Currently, a retail investor is subject to a trading fee of 0.02 to 0.03 per cent based on each transaction.

“It is highly expected that the total brokerage fees collected would drop when the new rule becomes effective because brokerages need to offer further cuts to keep clients,” said Ivan Li, a trade dealer at Everbright Securities. “With the clients, brokerages could offer them other services to pursue new growth.”

It is estimated that companies could break even in their brokerage services with a fee of 0.02 per cent per transaction.

Analysts said a rate below 0.02 per cent could be offered to high-net-worth clients by some brokerages to retain the wealthy investors.

Lan said that a liberalisation of the brokerage service sector wouldn’t necessarily mean a price war, and it could also force the companies to upgrade their online trading system to save costs.

“The increasing popularity of the internet helps create a cost-efficient model,” he said. “Brokerages should increase the use of financial technologies to better serve clients.”

The mainland and Hong Kong securities regulators launched the Shanghai-Hong Kong stock connection schemes in late 2014, allowing investors to cross-trade shares on each other’s markets.

The cross-trading system linking the Shenzhen and Hong Kong markets is expected to debut this year.

China is also likely to connect its stock market with other foreign exchanges in Western countries such as London to facilitate mainland investors’ purchase of overseas-listed shares.

Industrial Securities said it planned to list its Hong Kong subsidiary on the Hong Kong stock exchange this year.

“The listing would make our offshore business stronger to better tap the cross-border opportunities,” Lan said, adding that Industrial Securities would consider expanding beyond the Hong Kong market.