China and the US have agreed on a series of market-opening
measures in securities industries during the second round of the
Strategic Economic Dialogue (SED).
Those steps include China allowing more overseas market players
to set up joint venture securities firms in the second half of this
year.
The country will also allow international firms to expand their
business from underwriting to brokerage, principal investment and
asset management before the third round of SED later this year.
Analysts point out that the opening up of the securities
industry is unlike the opening up of other sectors, and might
adversely affect local brokerages as the securities service
business has long been a puny industry because of the
underdeveloped capital market.
China made a less opening commitment in its securities industry
in the World Trade Organization (WTO) for the same reason.
"Unlike commodity trade, in which China and the United States
both have their own advantages, China's financial services industry
remains small and sluggish, and unable to face foreign
competitors," said Zhao Xijun, a professor with Renmin University
of China.
Agreed She Minhua, an analyst with CITIC China Securities,
saying opening up the securities industry will be much more
significant than the opening up of commercial banks.
China opened up its banking industry on December 11. Compared
with their foreign rivals, local commercial banks have obvious
advantages - they have all developed strong networks across the
country that make it hard for foreign banks to compete.
But as the brokerage business is founded on knowledge, talents
and credit, rather than infrastructure, local firms are too weak to
compete with the likes of Goldman Sachs and Morgan Stanley.
"After the British opened up its securities industry, its local
brokerages, squeezed by giant international securities firms, lost
the chance to grow into big firms," said Cheng Weiqing, analyst
with CITIC Securities.
Cheng said local brokerages have been growing in a closed
environment with no competition. Though they have been improving
their services in recent years, they are way behind in innovation
compared with their American rivals.
"The opening up should be step by step, giving local firms
enough time to adjust and grow in order to face the competition,"
Zhao from Renmin University of China said.
Mergers and acquisitions
The China Securities Regulatory Commission (CSRC) has banned
international companies from investing in local securities firms
since September, worried that it will pose a threat to local
brokerages even before they recover from four years of sluggish
growth.
Ma Qing, chief economist of CITIC Securities, said once the
regulator lifts the ban, the merger and acquisition war among local
securities firms will only intensify.
Ma said that unlike a year ago, under such a bullish market the
merger and acquisition costs of local brokerages have increased
rapidly.
UBS AG and Goldman Sachs Group Inc were the only foreign firms
with brokerages in the country before the ban. Morgan Stanley and
Merrill Lynch, No 2 and 3 US securities firms by market value, may
be among the primary beneficiaries of the new opening up.
But Ma pointed out that from a global perspective, few of the
joint venture models succeeded. More so as China and the US did not
reach any agreement for foreign investors to hold a controlling
stake in a local securities firm, which is capped at 33
percent.
Meanwhile, in order to increase local brokerages' competence,
the securities regulator is encouraging innovative brokerages to
expand via listing on the stock market or taking over bad
performers.
The CSRC has approved Haitong Securities as the first brokerage
to make a backdoor listing. Haitong will take over Shanghai Urban
Agro-Business, change its name and have a total of 3.4 billion
shares after the transaction.
Another leading local brokerages, China Merchant Securities,
recently announced that it is consulting Goldman Sachs, Gao Hua
Securities Co and UBS Securities on an IPO plan. The announcement
triggered market speculation that the Shenzhen-based firm might
launch an IPO soon. If it does, it would be the first securities
firm to seek a direct listing since 2002, when CITIC Securities
launched its IPO.
(China Daily June 22, 2007)