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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)