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The Central Huijin Corporation says it has won approval from the State Council to inject funds into China Galaxy Securities, one of China's biggest state-owned brokers, to restructure the securities firm.
Market sources said the funds may be about US$1.5 billion and would be injected in several batches.
Central Huijin is a wholly state-owned investment company that focuses solely on equity investment in the nation's major financial institutions with approval from the State Council.
Meanwhile, two other securities firms were put on the regulator's "blacklist".
On Monday, Guangzhou-based Min'an Securities and Shenzhen-based Wuzhou Securities were asked to put their operations under the control of Guosen Securities and Donghai Securities, both pilot brokers enjoying support policies.
The two controlled brokers were caught embezzling client funds, committing fraud and other irregularities.
The different treatment is a natural result of the regulator's classified management of brokers, said Li Yongsen, a professor at the Financial and Securities Institute of the Renmin University of China.
Market watchdog China Securities Regulatory Commission (CSRC) is enhancing the massive market reshuffle by eliminating poor players and supporting good performers.
So far about 18 problematic brokers have handed over their reins.
Twelve have been selected as pilots to experiment with product innovation and enjoy support for future development.
These pilot brokers have been allowed to launch new businesses such as joint-asset-management operations and short-term interbank market bond issuance.
Some of them can also get low-interest loans from the central bank to increase capital liquidity and deal with market difficulties.
Direct capital injection from the government is not a commonly-used method in brokerage restructuring, but it is understandable, said Li.
It is very hard for the brokerage to restructure itself in the sluggish market. External forces are needed, he said.
According to recent statistics by the Securities Association of China (SAC), the whole brokerage sector lost about 15 billion yuan (US$1.81 billion) last year. Until the end of 2004, the whole net capital of China's brokers was less than US$5.5 billion.
Although some brokers are operating well, they are not strong enough. The biggest gainer CITIC Securities won profits of only 206 million yuan (US$24.9 million) last year.
Financial institutions are very special, playing a significant role in keeping social stability, especially when China is now engaging in share structure reform, Li said.
The "invisible hand" of the market is not enough now and the "visible hand" of the government is needed, he said.
The government can help foster competitive players by offering policy and capital support, said Dong Chen, a senior analyst at China Securities.
When these brokers grow powerful enough, they can push the market merger and acquisition and then sharpen the domestic brokerage's competitive edge over foreign competitors, he said.
The fund injection by Central Huijin is a concrete manifestation of the government's efforts to develop the country's capital market as well as the securities sector. The move will help create a sound market environment for the current state share sale reform and boost investor confidence in the nation's securities market, said Zhu Li, president of China Galaxy.
China Galaxy Securities, incorporated in 2000, is a state-owned securities firm with a registered capital of 4.5 billion yuan (US$542.2 million). It was the biggest broker in terms of stock and bond transactions and the No1 lead underwriter of stock offerings for 2004, according to SAC statistics.
(China Daily June 16, 2005)
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