China's Brokerages Have a Lot to Like From Xi's Opening

(Bloomberg Gadfly) -- With President Xi Jinping waxing lyrical about opening up China's financial services industry, you might think now isn't the best time to be a mainland brokerage.

From July, international securities firms will be able to swoop in and take control of their onshore ventures. But while Wall Street banks may be on their way, their path won't be smooth.

For a start, Beijing is making it easier for brokerages to go public. Great Wall Securities Co. got the green light from the China Securities Regulatory Commission this week. That will allow it to bulk up its capital base even though earnings have been declining, historically a no-no. Authorities also plan to allow "innovative" firms to skirt the three-year profit track record rule.

The advent of Chinese depositary receipts will provide another boost for domestic players.

CDRs are aimed at bringing technology companies listed in places like New York and Hong Kong home. These transactions will not only be big deals, but will require a "higher level of business sophistication and client franchise," according to analysts at Goldman Sachs Group Inc. That puts players like Citic Securities Co., which owns pan-Asian broker and research house CLSA Ltd., and China International Capital Corp. in the box seat. The pair also have sizable private equity fund management arms.

Chinese brokers with strong underwriting skills and an international presence will also benefit. They should have the nous to handle complex cross-border transactions, as well as the large domestic franchises necessary to place stock.

Citigroup Inc. estimates CDRs could increase revenue at some well-placed Chinese brokerages by as much as 5.3 percent this year, with additional takings for the industry as high as 7.6 billion yuan ($1.2 billion). Goldman Sachs predicts CDRs and other domestic IPOs will add 1.2 percent to brokers' top line.

It will be a welcome boost. Commissions have been shrinking, according to Bloomberg Intelligence analyst Sharnie Wong, while fund management and prop trading are becoming more important. The 2015 stock market crash also put off many punters, denting volumes.

It's also worth remembering that Chinese brokerages' day in the sun can quickly disappear. Recall how many were roped into national service in the wake of the equities plunge.

Becoming the next Goldman Sachs also won't be easy due to brokerages' predominately domestic focus. Citigroup alone deals in 160 markets and has 30 China desks globally moving money for mainland firms. Planting those kind of flags around the world will be tough at a time when protectionist sentiments prevail.

But as Xi promises a "new phase of opening up," Chinese brokerages can rest assured they've at least got a decent jump on Wall Street's heavyweights.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2018 Bloomberg L.P.

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