Opinion | China’s bold makeover of its capital markets a step in the right direction

At a time of unprecedented geopolitical uncertainty, punctuated by the Sino-American trade war, China has unveiled bold initiatives to modernise its financial sector. Historically, the modernisation playbook consisted of, first, reform to enhance the competitive standing of firms and capture synergies across market segments, then an epoch of openness to attract foreign participation in capital markets.

Although the Wealth Management Connect programme to forge closer economic ties in the Greater Bay Area has been garnering attention, a bolder and much-needed makeover is imminent in China’s banking, brokerage and insurance sectors.

The China Securities Regulatory Commission is mulling a pilot programme to award securities licences to state-owned commercial banks. If granted, Industrial and Commercial Bank of China, reportedly one of two banks being considered for the pilot, stands to conduct securities underwriting and certain brokerage services. This is a boon for commercial banks, which have been operating under China’s version of the Glass-Steagall Act that separates commercial from investment banking.

A more pressing concern is the woefully fragmented brokerage sector, with 131 firms having a combined asset size equal to Goldman Sachs’. The industry is plagued with inefficiencies – averaging 6 per cent return on equity, about half of Wall Street’s – and ripe for consolidation.

In a move that’s possibly a harbinger of mergers and acquisitions activity in the sector, officials are reportedly considering a proposal to merge the top two firms in the space, Citic Securities and CSC Financial. If consummated, the deal creates a road map for other corporate marriages as domestic firms steel themselves for the opening of the securities industry to foreign competition.