MARKET REGULATION
Across The Border
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Demand for brokerage licences soars as mainland stocks seen recovering

Analysts predict good times ahead for the securities sector as the regulator returns to its reform agenda

PUBLISHED : Friday, 09 September, 2016, 2:46pm
UPDATED : Friday, 09 September, 2016, 10:22pm

Demand for brokerage licences in China has soared to an eight-year high as investors shrug off weak market sentiment and vie for a share of the mainland securities industry.

According to the China Securities Regulatory Commission (CSRC), 16 applicants are currently waiting to see if their submissions for a brokerage licence are approved. That’s the highest number of applicants since 2008, and may increase in the coming months as confidence returns to the market, analysts said.

The frenzy of applications for new licences comes despite a sharp fall in first-half earnings in the brokerage sector amid investors’ lack of confidence in the stock market.

But analysts said investors had good reason to bet on the long-term health of the securities sector since Beijing would continue to play up the vital role of the capital market in its economic reforms.

The current leadership hopes more companies will raise funds from the stock market, rather than borrowing money from banks to replenish their growth.

The outlook for the securities industry remains bullish
Tang Shengbo, analyst, Nomura

“The outlook for the securities industry remains bullish,” said Tang Shengbo, a Nomura analyst. “The woeful performance in the first half of this year was due to a weak market performance, but it was a short-term turbulence.”

In the first six months of the year, 24 mainland-listed brokerage firms posted an average 51.8 per cent drop in revenue from the same period in 2015, and their earnings slumped 61.6 per cent.

The benchmark Shanghai Composite Index lost 17.2 per cent between January 1 and June 30 in tandem with sluggish trading.

A buying craze for A shares in the first half of last year, buoyed by a swell in margin trading, brought a windfall to the mainland brokerages despite a boom-to-bust scenario starting in mid-June.

The regulator refrained from liberalising the market and tightened its oversight of margin trading, which affected the brokerages’ businesses.

The stock market rout last year prompted the China Securities Regulatory Commission (CSRC) to temporarily halt a series of reform measures such as the implementation of a registration-based initial public offering (IPO) system.

But as the market stabilises, the regulator may return to the reform agenda to allow market forces to play a decisive role in the development of the country’s securities sector, analysts said.

“It will be just a matter of time,” said a former CSRC official with knowledge of the regulator’s thinking. “The main task facing the regulator now is to shore up investor confidence.”

Brokerage licences are seen as a precious asset for financial institutions as they provide the potential to tap mainland investors’ equity buying euphoria during a bull run.

The majority of the brokerages’ income derives from trading commissions.

Beijing has been wary of an invasion of foreign players into the lucrative industry, adopting a go-slow approach to opening up the industry to overseas investors.

At present, China has more than 120 securities brokerages; only a few of them have foreign investors among their clients.

The companies are allowed to engage in businesses such as investment banking, brokerage services, asset management and proprietary trading.

Beijing started vetting applications to set up Sino-foreign joint venture brokerages last year, attracting a clutch of investors such as HSBC and Mason Financial Holdings which formed tie-ups with local partners to provide a full range of securities businesses.

It is expected that competition in the brokerage sector will escalate as newcomers land on the market
Wei Wei, analyst, Huaxi Securities

Previously, joint-venture securities firms were only permitted to underwrite share and bond offerings.

“A licence for full-range businesses is strongly desired as foreign investors can not only tap the retail investors’ buying craze during a bull run, but also explore the potential in the asset management division,” said Wei Wei, an analyst at Huaxi Securities. “But it is expected that competition in the country’s brokerage sector will escalate as the newcomers land on the market.”

A price war among mainland brokerages to cut trading commissions has already emerged this year as they scramble to attract retail investors.

In March, Zheng Yang, director of the Shanghai Financial Service Office, told the South China Morning Post that the city was lobbying the CSRC to distribute more licences for joint-venture brokerages based in Shanghai, part of its efforts become an international financial hub.

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