China Stock Turmoil 2015

China brokerages’ year of living dangerously, as falling commission fees replace government intervention as major headwind, says ratings agency

Chinese brokerages face new challenge of market liberalisation

PUBLISHED : Thursday, 05 May, 2016, 9:40pm
UPDATED : Thursday, 05 May, 2016, 9:40pm

Chinese securities companies are to see reduced government intervention this year, as the extraordinary measures imposed by authorities in the wake of the dramatic market sell-off have been lifted.

However, these brokerages face a new threat in the form of commission fee liberalisation, which will stoke competition and drive down fees, in addition to changes brought on by other policy changes, Standard & Poor’s senior analysts said on Thursday.

China’s brokerages were prohibited from net selling after the stock rout ripped through mainland markets last summer, and they also were required to contribute heavily to a national fund to help shore up the markets.

The edict prohibiting net selling was scrapped by the end of last year, and industry sources said the bailout fund had suffered a loss of around 10 per cent as of April.

“We feel government intervention is eased this year, as authorities are turning more cautious in policy making and seem unlikely to introduce extraordinary policies,” said Qiang Liao, senior director with the ratings agency.

Securities firms were required last year to contribute a total of 220 billion yuan (HK$262.24 billion), almost the aggregate net profit made by the whole industry in 2015, to a market support fund operated by the China Securities Finance Corp (CSFC), at the behest of the regulator, China Securities Regulatory Commission (CSRC).

Although few expect the government to strong arm brokerages into further market-supporting measures this year, Qiang said new policies, particularly commission fee liberalisation pushed forward by the CSRC, would make competition more fierce as securities companies lower commission to attract investors in a slumbering market this year.

“The CSRC has issued several new brokerage licenses recently, and has proposed further liberalising the commission fee would intensify the peer competition,” Qiang said, noting that commission fees for stock trading, equity and bond underwriting are already heading downward, pressuring the profit margin of securities companies.

Another blow is the credit losses that may be triggered from the nation’s struggling corporate bond market.

“There will be substantial increase in defaults from the bond market as the government pushes for supply-side reform, but we need to keep it in mind this is from a very low level,” Qiang said.

The Securities Association of China said securities companies in China saw net profit plunge by 43 per cent year on year in the first quarter, mainly due to the high base effect from last year, during the bullish upward rise in the stock market. In the first three months of this year, net profit among brokerages totalled 28.90 billion yuan, according to the Securities Association.

Qiang said lower stock market turnover, less margin finance, a possible correction in the debt market, and a downward trend in brokerage commissions could hit the sector’s profitability in 2016. However, he said brokerages were likely to remain profitable.

“Their low leverage ratio makes [their] capital position strong,” Qiang said.

On the other hand, a chilly atmosphere created by a nationwide crackdown on market wrongdoings, including allegations of insider trading, much of it directed at securities companies and senior managers, seems to have calmed recently.

Xinhua reported last week the arrest of Cheng Boming, former general manager of CITIC Securities.

Earlier, CITIC Securities said it had cut off relations with senior managers under official investigation, announcing they had been dismissed from their posts in its annual report issued in March.

A week ago, China’s president Xi Jinping made a rare statement about the stock market, emphasising the importance of maintaining its healthy development, during an address given at a Politburo meeting in Beijing.

Market pundits reckon this could serve as a positive signal to the market.

Some are also betting that China will soon announce the formal kickoff of the long-awaited Shenzhen Hong Kong stock connect. Others speculate that he cross border trading scheme will also lead to the inclusion of A shares into the MSCI emerging market index during an annual review in June.