Move shows that Beijing is serious about banking reform but doubts persist over state agency's readiness As the benchmark Shanghai A-Share Index hit an eight-year low on Monday, brokers traded rumours about state loans and outright capital injections worth tens of billion of yuan into moribund brokerage houses. They know a massive state effort is afoot to radically reform the sector, which has been brought to its knees by poor management, ineffective regulation and successive years of abysmal stock market performance. China SAFE Investments - also known as Central Huijin Investments - is certain to play a key role in the bailout. Whether it is fully equipped for the task, however, is far less clear. Created in late 2003 as Beijing launched sweeping reforms of the state-owned banking sector, China SAFE is the official holding company for government stakes in restructured financial institutions. Rather than being a passive body that stamps paperwork, China SAFE is expected to exercise its ownership prerogatives to ensure transparent governance and effective management. While its portfolio was previously limited to banks, the government announced last month that China SAFE would take a controlling stake in Beijing-based China Galaxy Securities, after a state cash injection of as-yet undetermined size into the brokerage. The Galaxy bailout is part of industry-wide housecleaning that observers say will see China's 130 brokerages divided into three broad categories. Healthy brokerages will be left alone. Those deemed terminally ill will be put into liquidation by the China Securities Regulatory Commission. The remaining houses are to be restructured by a select group of state-owned agencies such as China SAFE. Beijing realises that money alone will not stop the rot afflicting the country's brokerages, many of which were awash in capital raised during a three-year bull run that ended in 2002. 'The industry [at the time] was at the peak of its profitability and attracted corporate shareholders seeking high returns,' said Guotai Junan Securities analyst Liang Jing. In 2002, for example, now-collapsed China Southern Securities expanded its registered capital to 3.45 billion yuan from one billion yuan, while increasing the number of shareholders to 56 from six. But the inflow of new capital did nothing to improve management in the sector. 'There were no accompanying changes in how brokerages were run,' a source close to the new round of government bailout under planning said. Business as usual included misuse of client funds to pay guaranteed returns or cover trading losses. Once the market turned sour, the house of cards collapsed and the sector descended into crisis. As it mops up the mess, Beijing is emphasising good governance as much as clean balance sheets. 'The amount of money injected is not the thrust of the problem,' the government source said. 'The top concern is whether the bailout can effect genuine governance changes.' China SAFE plans to be a jealous shareholder, despatching directors and managers to its brokerages. But as a young agency with a staff of just 45, it may be biting off more than it can chew. 'China SAFE is in desperate need of talent,' the source said. But some observers doubt that even a fully staffed China SAFE would be a panacea for the industry's ills. 'China SAFE can play a role, but one cannot exaggerate its effectiveness,' Mr Liang said. '[The brokerage problems] also reflect the stage of market development and regulatory deficiencies.'