China Brokers Race to Raise Funds to Fuel Stocks Frenzy

(Bloomberg) -- China’s brokerages are tapping the capital markets for funds at a record pace to expand their businesses and feed a world-beating stock rally.

At least 10 securities firms listed in the mainland market have this year raised a combined 79.6 billion yuan ($11.5 billion) from private share placements and the highest number of rights issues in a decade, according to data compiled by Bloomberg. Companies are also tapping the bond market. Bond issuance by listed securities companies hit a record 784 billion yuan in the first seven months of this year.

Brokerages need the funds to develop their margin trading businesses at a time when leverage is near the highest levels since the 2015 boom-and-bust. Regulators have encouraged top brokers to expand, while a flood of initial public offerings has also spurred their needs for greater capital strength. Lured by the rally, the number of new investors opening brokerage accounts in July surged the most in five years.

The frenzy coincides with China’s efforts to boost stock trading and make its capital markets a more attractive fundraising option for private enterprise. The Shanghai Composite is up about 11% this year, the best performing major index globally.

“The capital market has never been more important to China’s economic growth than it is now,” said Jiang Liangqing, a fund manager at Beijing-based Ruisen Capital Management. “Brokerages are seizing the opportunity to build up their war chests by taking advantage of the stock market rally.”

To be sure, the growth in margin trading has triggered comparisons with the chaotic burst of the 2015 bubble, given brokers will have a better ability to lend to investors to buy stocks. However, at 1.4 trillion yuan as of Monday, leverage is around half the level of its 2015 peak.

“The market is going up in the long run and naturally there will be demand for margin lending, and brokers will keep raising funds quickly because they don’t want to miss out,” said Sun Jianbo, president of China Vision Capital Management in Beijing. “But I won’t say a bubble has inflated until the Shanghai Composite hits 5,000 points.” The gauge was 33% below that level as of Thursday’s mid-day break.

For now, the brokerage financing pipeline remains strong. There are at least seven more equity financing plans announced by A-share listed brokerages, with a combined fundraising target of 54 billion yuan.

Brokerages are expected to maintain a strong level of financing, said Liao Chenkai, an analyst at Capital Securities Corp. “There are great opportunities in the stock market and in China’s capital market reforms, for these companies to take advantage of,” he said.

©2020 Bloomberg L.P.