Across The Border

Weak trading takes its toll on listed mainland brokerages

Of the 25 firms, 20 posted profit drops of more than 50 per cent in the first six months

PUBLISHED : Friday, 15 July, 2016, 4:39pm
UPDATED : Friday, 15 July, 2016, 7:57pm

Not a single publicly-traded mainland brokerage reported revenue growth in the first six months of this year owing to the weak market.

Despite with the regulator’s efforts to help strengthen their financial muscle amid the internationalisation of the capital market, of the 25 listed firms, 20 posted profit drops of more than 50 per cent from the year earlier.

The woeful results will be embarrassing for the regulators, after their efforts to bolster performance ahead of a full opening up of the stock market.

On the mainland, the word ‘brokerage’ refers to securities firms whose businesses encompass investment banking, asset management, consultancy and offering brokerage services to clients.

The securities sector there is still off-limits to foreign players with only a small number of selective overseas companies allowed to set up joint-venture firms with local partners.

The majority of their revenue comes from trading fees charged to retail clients.

A bull market that triggered a buying euphoria among around 100 million individual investors should have brought a huge windfall for the firms, allowing them to build resources to cover costs in the event of a market moving in the other direction.

2016 has been a tough year for brokerages. With falling interest in buying stocks, derivative businesses such as margin trading are all negatively affected
Ivan Li, a trade dealer at Everbright Securities

Battered by a stock market rout last year, mainland investors have became extremely cautious on equities this year.

“2016 has been a tough year for brokerages,” said Ivan Li, a trade dealer at Everbright Securities.

“With falling interest in buying stocks, derivative businesses such as margin trading are all negatively affected.”

The Chinese government was hoping to build the strength of its brokerages, prior to a full opening of the stock market to foreign investors.

The A-share market is now the world’s second largest in terms of capitalisation, and there had already been industry talk of creating China’s very own versions of Morgan Stanley or Goldman Sachs, once the market had fully developed.

But analysts remain highly skeptical, that any Chinese security firm will ever become as large and powerful as the Wall Street giants.

In the first half of this year, Citic Securities, the largest mainland brokerage, recorded net profit of 3.58 billion yuan (HK$4.15 billion), a 71 per cent tumble on the same period last year.

To put that in perspective, during the first quarter Morgan Stanley’s net income was US1.13 billion.

The China Securities Regulatory Commission (CSRC) started expanding the sources of revenue for brokerages in 2008, allowing them to operate margin trading and short selling businesses.

They were also encouraged to diversity into alternative investment classes and asset management segments to raise profitability.

Like many types of company in China, in the past few years brokerages including Citic Securities have been looking to expand globally by either setting up overseas businesses or acquiring offshoots outside the mainland.

Their aggressive diversification and the strong government incentives, however, have simply not been enough to drive them to anywhere the size of their international peers.

In the first half, Shanghai-based Orient Securities posted a 79 per cent fall in its revenue, the biggest decline of the 25 listed mainland brokerages.

The stagnant stock market has already prompted some to slash trading fees to either retain existing or woo new retail clients.

The CSRC is now expected to loosen regulations on securities trading fees to underpin the more than 110 brokerages.

The regulator is also likely to allow them to charge a fixed brokerage fee on a monthly basis, regardless of a client’s total trading value.

“China’s secondary market will continue to be attractive to foreign investors given the relatively large trading volume,” said Ivan Shi, head of research at consultancy Z-Ben Advisors.

“New joint-venture licenses for brokerages will still be chased by foreign companies and their local partners.”

Greenland Holding Group, one of the mainland’s three largest developers, is also among the investors seeking a joint-venture licence with foreign partners to set up a brokerage, as a way to accelerate its diversification into finance sector.