With a continuing massive inflow of domestic and foreign funds flow into the market, the Shanghai Composite Index has breached the psychologically important level of 2000 points, rising 70 per cent since the beginning of this year.
On the supply side, the China Securities Regulatory Commission approved as many as ten new initial public offerings (IPOs) in November. The massive fund inflow indicates that the regulator will approve a growing number of share issues in the months to come.
A bright future is just over the horizon for Chinese brokerages, especially the industry''s major players.
Chinese brokerages are currently fighting for licenses to underwrite stock and bond sales. The regulator''s deadline of October 31, by which date brokerages had to finally comply with its new financial standards, helped encourage a reshuffle in the industry.
Commenting on the deadline, an industry analyst said it was "a beginning rather than an end," adding that securities firm have become increasingly competitive since October 31.
According to Deutsche Bank China''s Chief Economist Ma Jun, the next decade will be a period of profound consolidation in the sector, with around two-thirds of China''s brokerages going out of business and around 60 per cent of the market being controlled by five or six major players.
Leading securities firms such as CITIC Securities and Guangfa Securities have already profited from the revival in the Chinese stock market''s fortunes. Shanghai-listed CITIC Securities'' third-quarter financial report showed a net profit of 944.9 million yuan (US$119.6 million), a fivefold increase on the same period last year.
Given such healthy circumstances, leading securities firms have taken the opportunity to expand their networks, range of services and net capital.
Financial reports covering the first half of the year showed that the net capital of the top 20 brokerages reached 44.9 billon yuan (US$5.68 billion), 73 per cent of the industry total.
"A few leading brokerages demonstrated great competitiveness in terms of capital, networks, innovative capabilities and risk-management skills," said Liang Jing, an analyst from Guotai Junan Securities.
Given such intense competition, many brokerages are seeking to boost their capital in order to expand their business. A few brokerages such as Changjiang Securities, Guangfa Securities, China International Capital Co and Everbright Securities have drawn up plans to raise fund through IPOs.
Industry opens up
Brokerages not only face competition from their counterparts, but also from newcomers to the industry, such as lenders, asset management companies and foreign investment banks.
Commercial banks are currently already able to underwrite bonds, financial bills, and commercial bank bonds. Meanwhile, lenders are continually expanding their investment banking departments. With a large amount of customer resources, their competitive advantage is overwhelming.
For example, the Industrial and Commercial Bank of China the nation''s biggest lender boasted 2.5 million clients by June 30.
To operate an investment bank in China, foreign firms require a license to underwrite stock and bond sales. They need a separate brokerage license to trade securities. Only Goldman Sachs, French lender BNP Paribas, and CLSA Asia''s biggest brokerage currently have underwriting licences, while Goldman Sachs is the only one to possess a brokerage licence.
UBS, the biggest Swiss bank, has purchased 20 per cent of Beijing Securities for US$210 million to gain underwriting and brokerage licenses.
Merrill Lynch, Morgan Stanley and JP Morgan Chase have all indicated that they want to establish local firms.
Foreign firms are restricted to owning 33 per cent of an investment banking venture and 20 per cent of a brokerage.
The government last month closed the door on future partnerships by preventing any more overseas firms from buying domestic brokerages. And it is unlikely to allow any new purchases by overseas firms until 2007, when the reshuffle of China''s long-troubled securities sector is expected to end and local firms are strong enough to handle international competition.
China will fully open its financial sector by the end of this year, which means a much wider channel for foreign funds to enter this emerging market.
However, there is a large gap between domestic brokerages and their foreign counterparts. Statistics show that the combined revenue and profit of Chinese securities firms were US$2.9 billion and US$1.56 billion in the first half of this year, while Goldman Sachs had overall revenue and profit in the first half of 2006 of US$20.4 billion and US$50.4 billion, four and eight times that of China''s securities sector. -China Daily