Securities houses facing reshuffle wave
By Sun Min (China Daily)
Updated: 2004-11-01 08:45

More poor-performing securities houses are expected to be taken over by big institutions or government agencies, as Chinese authorities carry on reforms to clear up irregularities in the sector.

An official with the China Securities Regulatory Commission (CSRC), the securities watchdog, said reshuffling of the securities business is being implemented step by step with further actions to be taken.

It is expected that similar news of authorities or big financial institutions taking control of securities houses will hit the headlines.

But no details will be available before official announcements.

However, the CSRC official denied earlier reports of a list of the so-called "high-risk" or problematic securities firms, which presumably included 63 securities firms that were classified in certain risk levels. The reports also alleged that 12 high-risk firms would face an official takeover or closure.

Such reports have exaggerated the facts, the CSRC official said. The incorrect information has exerted a negative impact on the market and misled the public, causing unnecessary panic and investor losses.

While the authorities are prudent yet firm with the rectification of the securities industry, some domestic and overseas firms have found opportunities in the reshuffle that is gathering pace as market reform intensifies.

In only two months, six domestic securities firms have been taken over by the State. The most recent one was Liaoning Securities from Northeastern China's Liaoning Province, whose operations were taken over by China Cinda Asset Management Co on October 22, according to a CSRC announcement last Tuesday.

A frequently given reason for official takeovers is irregular operation by the securities houses, though the exact misbehaviour is not always clearly stated.

Analysts said that embezzlement of client funds, illegal investment activities as well as failure in investment that produced heavy debts and losses were the major causes for government action.

However, government rescue or administrative order will not be the sole resolution of the problems. It is expected that more market-oriented mergers and acquisitions (M&A) will emerge to promote the industry's restructuring.

CITIC Securities' recent acquisition attempt of GF Securities is such an example.

Though CITIC failed to gain control of the acquisition target due to strong resistance from the latter, the move was regarded as a meaningful one in the process of market reform.

"It is a general trend that more M&A will take place in the securities industry, which needs consolidation to become more competitive," said Liang Jing, an analyst with Guotai & Jun'an Securities in Shanghai.

The Chinese companies may not have sufficient experience in this field at present, but they should catch up quickly as more foreign companies muscle in.

Already, big global investment banks, including Goldman Sachs, are eying opportunities in the Chinese market to run their own securities business here without breaking existing rules.

Goldman Sachs is reportedly involved in a joint venture initiative, working with a newly formed securities house, Beijing-based Gaohua Securities, to launch a joint venture securities company.

Gaohua has already acquired an operational licence.

The company was founded by mainland investment banker Fang Fenglei and associates, with finance from Goldman Sachs.

Goldman Sachs has declined to comment on the matter, but insiders say that it would be able to have control of the new venture through the manoeuvre, while several other foreign companies also have similar plans.

To ensure fairness and transparency in competition, China should also speed up relevant legal construction, especially for M&A and information disclosure, said Liang Jing.

"I think it should take about two to three years for the securities companies to finish the first round of reshuffles, which will drive out a number of poor performers and nurture competitive ones," said Zhu Jianfang, a China Securities analyst.

Zhu said it was hard to predict the exact moves for such restructuring and short-term impact on the bourses, but in the long run, the prospects of the securities industry will still be optimistic, given the development potential of the Chinese capital markets.

Close