Across The Border
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Brokerages in mass dash to raise fresh funds

PUBLISHED : Friday, 14 October, 2016, 4:44pm
UPDATED : Friday, 14 October, 2016, 11:01pm

A fundraising spree by Chinese brokerages aimed at meeting heightened capital requirements by the regulator is already siphoning off staggering amounts of liquidity from the mainland and Hong Kong stock markets.

On the A-share market, at least five brokerages have either conducted or plan share placements with expected total proceeds exceeding 40 billion yuan.

In Hong Kong, a clutch of mainland brokerages, including China Merchants Securities and China Securities Company (CSC), have also been raising funds through initial public offerings to replenish capital levels.

“This race by brokerages to raise funds will last for a while yet, as companies are under pressure to strengthen their capital bases,” said He Yan, a hedge fund manager with Shanghai Shiva Investment.

“The regulator still hopes to develop a domestic securities industry.”

On the mainland, the term “brokerage” refers to securities companies who hold a batch of licences to offer brokering, investment banking, asset management services.

The recent fundraising euphoria resulted from a new rule set by the China Securities Regulatory Commission (CSRC) that became effective on October 1, which tightened the capital requirement of brokerages.

Those which can’t meet the required minimum ratios, such as the percentage of cash reserved for covering risks, risk being barred from expanding into certain businesses.

This race by brokerages to raise funds will last for a while yet, as companies are under pressure to strengthen their capital bases...The regulator still hopes to develop a domestic securities industry
He Yan, hedge fund manager, Shanghai Shiva Investment

The new rules also heightened requirements on cashflow and leverage, prompting mainland brokerages to seek fresh capital to pave the way for further growth.

The wave of fundraising by mainland brokerages comes just two years after they generated more than 100 billion yuan through refinancing, to help boost their margin trading businesses.

In 2014, mainland brokerages aggressively offered new shares to bring in additional capital, so they could lend more money to clients to trade in shares.

A strong rally between October 2014 and mid-June last year saw surging volumes of margin trading as the total amount of loans granted by mainland brokerages to their clients topped 1 trillion yuan.

But a sharp fall followed, wiping more than US$5 trillion in value from the market, in late August.

Since Beijing first established a stock market in 1990, it has been envisioning it would create the country a host of powerful finance institutions, to stand alongside global heavyweights such as Morgan Stanley.

But the mainland is yet to fully open the capital market, despite a series of liberalisation projects including the Stock Connect trading link between Shanghai and Hong Kong, with a second now expected between HK and Shenzhen.

The CSRC has given priority to the growth of home-grown brokerages, encouraging them to strengthen their financial muscle by diversifying their businesses into margin trading and asset management, for example.

But so far the majority of their revenues have been generated by trading commission fees collected from mainly retail stock investors.

The brokerage service segment is now off-limits to foreign companies, although the regulator did start vetting applications last year, for joint-venture brokerages seeking a full range of licenses.

“The regulator is aware of the importance of nurturing the growth of domestic securities firms,” said Wang Feng, chairman of Ye Lang Capital.

“But the efforts to bolster their businesses in the past decade have proved unsuccessful.”

According to the Securities Association of China, half of the mainland’s 120-odd brokerages reported a decline in net assets in the first half of this year, blaming high cash dividend payouts and the expiry of subordinate bonds used to boost their capital base.

Galaxy Securities reported its net capital fell to 46.3 billion yuan in June, compared with 60.6 billion yuan at the end of 2015.

Of the country’s ten largest mainland brokerages, nine saw their net assets drop in the first six months.

On the A-share market, seven securities companies recently completed additional share sales or unveiled refinancing plans, that soaked up funding worth more than 42 billion yuan.

In Hong Kong, China Merchants Securities raised US$1.5 billion via an IPO in early October, while CSC is likely to net another US$1 billion after going public.

Mid-size mainland brokerage Industrial Securities also announced it plans to list its Hong Kong subsidiary to replenish capital levels, while Orient Securities raised US$1 billion via an IPO on the Hong Kong stock market in April this year, and Everbright Securities sold US$1.2 billion of shares in August.

Brokerages are also resorting to the national over-the-counter (OTC) equity market, dubbed as the New Third Board, to seek capital infusion.

China Dragon Securities recently announced plans to raise up to 10 billion yuan of funds on the OTC market.