China's Brokerage Sector: Mega-Mergers Surge as Competition Remains Intense and Fragmented

The highly competitive Chinese securities industry, which comprises over 140 companies, has faced repeated scrutiny from regulators, according to S&P Global.

The Chinese securities industry, valued at around 12 trillion yuan ($1.6 trillion), is expected to stay decentralized and highly competitive, even with the current consolidation efforts initiated by Beijing aimed at fostering globally competitive firms, as stated by S&P Global Ratings.

The composition of the industry over the coming twenty-four months isn’t expected to shift dramatically," stated the ratings firm in their report released on Friday. "Although leading companies may secure additional market share, the segment should stay divided with intense competition continuing.

The Chinese securities industry, which includes over 140 companies, experienced fierce rivalry in terms of pricing, service quality, and underwriting standards. This led to numerous regulatory alerts, as stated by the company. The report also noted that aggressive underwriting tactics might elevate the risk for these securities firms.

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Recently, according to the state-owned newspaper Securities Times, some Chinese investment banks proposed extremely low fees as little as 0.01 percent to secure sponsorship and underwriting roles for Contemporary Amperex Technology’s (CATL) upcoming share issuance in Hong Kong. CATL, recognized globally as the leading manufacturer of batteries for electric vehicles (EVs), aims to raise a minimum of $5 billion through this secondary listing.

In November, the supervisory bureau of the China Securities Regulatory Commission located in East Zhejiang Province imposed penalties on Zheshang Securities due to inadequate independence in specific sponsor activities and for charging fees substantially lower than those typical in the sector.

In March 2024, CSRC issued guidelines to restructure the industry to sharpen its competitiveness and to build world-class investment banks by 2035.

Since then, at least six merger plans have been implemented. In late last year, Guotai Junan Securities and Haitong Securities unveiled a $16 billion merger aimed at forming China’s largest securities firm.

On Friday, Chinese media announced that the new organization would be called Guotai Haitong.

A report last month by Reuters claimed that China International Capital Corporation, owned by the Chinese government, planned to merge with China Galaxy Securities. However, both companies refuted this information.

Approximately 20 percent of the industry's total assets as of June 2024 were attributed to deals announced since late 2023, based on S&P’s estimations.

It suggested that the acquisition frenzy would probably persist, owing to the regulator's encouragement of top-tier participants to boost the industry’s capability in facilitating China’s economic shift and fostering innovation, alongside addressing wealth management demands.

When compared to their international counterparts, China’s leading investment banks are generally smaller and have a stronger focus on domestic markets. However, numerous firms are now venturing into foreign territories to cater to China’s increasing appetite for global assets and assist local companies looking to expand internationally. This expansion might present new opportunities along with potential hurdles, particularly amid rising geopolitical uncertainties, as noted by the company.

However, consolidation marks just the start of a process that might require at least two years, as stated by S&P.

It stated that merging two balance sheets is merely the beginning.

Following the merger, brokerage firms are anticipated to concentrate on boosting their client service capabilities by providing an expanded array of financial services and refining risk management practices as they scale up operations and extend their geographic reach.