Pricing agreements will make identifying non-viable companies in this already crowded sector much more difficult A recent flurry of minimum commission alliances among mainland brokerages has triggered concerns about anti-competitive behaviour in the industry. Critics worry that the regional price pacts will make it difficult to root out uncompetitive players from the crowded sector and harm the interests of China's under-represented retail investors. 'The emergence of commission alliances is bound to smother price competition between firms,' Yan Yiming, a prominent mainland lawyer who has represented minority shareholders in lawsuits against listed firms, told the Shanghai Securities News. 'They would enable uncompetitive firms to stay afloat.' Zhao Xijun, a People's University professor in Beijing, warned such price pacts walked a fine line between protecting the securities industry in an adverse environment and fostering anti-competitive behaviour. The controversy arose after all 107 brokerage outlets in Guangzhou pledged to adhere to agreed minimum commission rates from this week. In Shenzhen, which has the highest density of brokerage outlets in China, more than 90 per cent of its 190 local brokerage outlets formed a commission alliance in April last year. Any price collusion risks breaking China's limited anti-trust rules. However, the pacts had been defended on the grounds that they alleviated industry woes and ensured service quality to investors. The alliances were formed in response to a China Securities Regulatory Commission move to replace the fixed 0.35 per cent commission rate from last May with a floating rate capped at 0.3 per cent of trading turnover to foster market competition. Instead of a natural selection process to eliminate uncompetitive players, however, a fierce price war ensued. That, compounded by a more than 30 per cent fall in mainland share prices, contributed to widespread losses among the mainland's 124 brokerages. Even in Shenzhen, where a price pact was formed days before deregulation took effect, brokerage commission fell 26 per cent last year. Yan Weimin, secretary-general of the Shenzhen Securities Association, in defence of the price pacts, said: 'A two or three-year transition period is needed for this managed float of commission rate. If brokerages go under, investors' funds will be in danger.' However, concerns were voiced that the price pacts represented a slippery slope that would result in anti-competitive behaviour. Mr Zhao said: 'If they are used to extract monopoly profit and impose exorbitant charges on investors, then it becomes a problem.' Xiangcai Securities broker Tang Yong said retail investors would bear the brunt of higher rates as mainland brokerages often negotiated lower commissions with bigger clients. Mr Zhao said: 'The regulator often puts great weight on market stability and brokerages' survival. By contrast, retail investors, who dominate the Chinese market, are under-represented.' He said there was cynicism that the brokerage commission pacts were doomed to fail as miserably as the ill-fated alliances between China's multitude of television makers five years ago.
