SHANGHAI - China's securities watchdog is planning to allow asset management units of brokerages to launch private equity funds for the first time as soon as this year, according to two people with direct knowledge of the situation.

The pilot scheme would enable Chinese securities companies to broaden their revenue streams, reduce reliance on trading commissions and move further toward a model adopted by global investment banks such as Morgan Stanley and UBS.

The move also reflects the China Securities Regulatory Commission's (CSRC) ambition to exert more influence in the country's fast-growing private equity industry.

"The asset management business represents fertile soil for Chinese brokerages, but they also face tough competition in this arena from banks, trust companies and mutual fund managers," said Zhao Xianghuai, analyst at Ping An Securities Co.

"Private equity funds could be a welcome innovative business that could attract new clients and fuel asset growth at brokerages."

The CSRC is drafting rules that would allow the asset management companies to raise money from clients to invest in equities of unlisted companies, said the sources, who declined to be identified because they were not authorized to speak to the media.

Some brokerages, including CITIC Securities, Haitong Securities Co and China International Capital Corp, have been allowed to conduct private equity investment using their own capital.

Two brokerages - Orient Securities Co and Guotai Junan Securities Co - have established asset management units, seeking to compete more effectively with much bigger mutual funds to manage wealth from increasingly rich Chinese, and more securities companies are likely to follow suit.

Chinese brokerages are rushing to diversify their businesses as incomes from traditional trading commissions slide amid market sluggishness and cut-throat competition.

Regulators have in the past few years introduced margin trading and short selling, launched a Nasdaq-style startup board and allowed brokerages to establish separate asset management units with the goal of helping them transform their business models. Currently, brokerages are still heavily reliant on commission incomes, with their investment banking fees highly volatile, and assets under management totalling merely several dozen billion yuan combined.

Reuters

(China Daily 02/17/2011 page17)