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Dapeng Securities, once one of China's leading private securities firms, has become the first broker to announce its bankruptcy. Huge losses and the embezzlement of clients' money caused the firm to go under.

 

Unable to cover 2.7 billion yuan (US$333 million) in debts, the firm was finally declared bankrupt by Shenzhen Intermediate People's Court yesterday.

 

The bankruptcy announcement comes a year after the securities authorities barred the firm from doing business.

 

After completing liquidation, the firm had paid its employees their unpaid salaries and had returned deposits to individual clients.

 

Under Chinese rules, corporate clients are the last group to get their money back.

 

"Because Dapeng Securities already had a huge debt, and is basically a private firm, it was very hard to reach an agreement with creditors to restructure," according to a source at a law firm dealing with securities issues.

 

A number of securities firms have been closed or taken over by other companies due to heavy losses or because of illegal operations.

 

But this does not necessarily end in bankruptcy if an agreement with creditors can be reached over restructuring.

 

The government's support has saved a few firms from bankruptcy. The Ministry of Finance wrote off the debts of South Securities, a State-owned firm that closed in 2004.

 

Currently, China has no specific provisions that detail how a securities firm should apply for bankruptcy.

 

The Dapeng case, experts point out, will be a guide for other firms that are ready to apply for bankruptcy.

 

Sources at the Supreme People's Court said that securities firms that apply for bankruptcy, after they have been liquidated and paid back all individual debts, should submit applications to the China Securities Regulatory Committee (CSRC).

 

The court will then decide whether a firm should be allowed to go bankrupt, be taken over or be restructured.

 

China will probably write the above procedure into a draft of China's new bankruptcy law, according to Li Shuguang, a member of the draft committee.

 

The CSRC withdrew Dapeng's trading license at the beginning of 2005 because it had suffered a 4.4 billion yuan's (US$540 million) loss and had embezzled 90 percent of clients' money. The embezzled amounted to more than 800 million yuan (US$98.77 million).

 

Changjiang Securities, a good-performing securities firm in South China, had taken over the management of Dapeng Securities.

 

It bought the firm's 24 branches and took over its entire staff.

 

Twenty-one securities firms recently reported a combined 1.2 billion yuan (US$148 million) loss in their 2005 pre-audited financial reports, with losses mainly in traditional brokerage and proprietary business.

 

Experts suggest poor-performing stock markets, a lack of diversified profit models, narrow funding channels, irregularities, legal loopholes and fierce competition all contribute to problems faced by securities firms.

 

China has about 130 securities firms. More than 20 have reportedly been listed by the CSRC for "high-risk monitoring," meaning the firms are under close supervision.

 

(China Daily January 26, 2006)