Consolidation in China’s 12 trillion yuan (US$1.6 trillion) brokerage sector is expected to accelerate next year, as more industry players answer Beijing’s call to create world-class investment banks that can rival global giants like Goldman Sachs and Morgan Stanley.
More high-profile, government-led deals are likely to emerge in 2025 following the megamerger of Guotai Junan Securities and Haitong Securities, which is expected to create the industry’s largest firm by assets, according to analysts. Brokerages that have state-backed shareholders in common are more likely to be paired up, they say.
Shanghai, home to China’s largest stock market, has signalled it will do more to help cultivate two to three investment banks that can compete on the global stage by 2035. In a three-year plan, unveiled earlier this month to support asset revamps of the city’s listed companies, Shanghai highlighted the need to expedite brokerage mergers to construct top-tier investment banks.
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“The consolidation in the brokerage industry is accelerating,” said Xu Yingying, an analyst at Caitong Securities. “The policy direction is crystal clear: boosting competitiveness by mergers and acquisitions as well as an optimisation of the allocations of state-owned financial assets.”
The initiative to nurture home-grown, world-class investment banks was first mooted by China Securities Regulatory Commission chairman Wu Qing as part of the package to arrest a decline in the stock market. The objective was subsequently endorsed in a high-level guideline document issued by the State Council this year, which called for a restructuring of the industry to sharpen competitiveness.
At least six merger plans have been rolled out since then. Aside from the Guotai Junan-Haitong tie-up – valued at about 100 billion yuan – Zheshang Securities bid for a 15 per cent stake in Guodu Securities and Guolian Securities unveiled a plan to buy out Minsheng Securities.
People passed a sign for Haitong Securities in Wuhan, China. Photo: Imaginechina via AFP alt=People passed a sign for Haitong Securities in Wuhan, China. Photo: Imaginechina via AFP>
Brokerages with common ownership are likely candidates for consolidation. Speculation has been swirling that China International Capital Corp would merge with China Galaxy Securities; Central Huijin Investment has a controlling stake in both firms.
It is likely the same story for Hua An Securities and Guoyuan Securities; the state-asset regulator in eastern Anhui province is their largest shareholder. A pairing of Changjiang Securities and Tianfeng Securities is also a good bet, as both firms are backed by the Hubei provincial government, according to market observers.
“There are too many brokers relative to the size of the market, and all this is leading to very tough competition,” said Michael Chang, head of Asian financials at CGS International Securities Hong Kong. “So across the industry, there is a belief that you have to [consolidate]. If you consolidate, you can have economies of scale, better efficiency ratios and … as you become bigger, you should be more able to compete against the global investment banks.”
By the end of 2023, China’s securities industry had a total of 11.8 trillion yuan worth of assets with 145 companies, according to the Securities Association of China. That was a fraction of 433 trillion yuan in assets for the nation’s banking sector.
A consolidated brokerage industry with larger players would also help the sector to compete in terms of scale and diversity of revenue sources, according to Fitch Ratings.
Average revenue generated by China’s leading brokerages was less than US$10 billion over the past few years, about a fifth of global peers like Morgan Stanley and Goldman Sachs, the ratings agency said.
Fitch also said Chinese brokers are too reliant on stockbroking and proprietary trading, which makes them vulnerable to market gyrations. Global rivals earn between 30 and 50 per cent of their revenue from asset- and wealth-management businesses.
In the first nine months of 2024, China’s publicly traded brokerages reported an average profit decline of 6.1 per cent from a year earlier, along with a 6.3 per cent drop in revenue, according to data from Tianfeng Securities. The benchmark CSI 300 Index is up 16 per cent so far this year, but trading has been volatile in reaction to stimulus news – and this has hurt demand for stocks.
Chinese brokerages also need to grow so they can innovate technologically and satisfy clients’ desire to diversify their investments, said Xi Cheng, an associate director at S&P Global Ratings. China’s evolving economic landscape would fuel more equity financing as well as demand for access to overseas investments and wealth-management products, she said.
“These investment banks need to be on a certain scale and once you have a scale, your efficiency ratio is improving, you have stronger brand value, and you should be able to attract more customers,” CGSI’s Chang said. “But with the state of the industry right now, you do need more consolidation and that is clearly the [way] that things are going.”
