China Weighs Letting Big Banks Broker Deals on Wall Street Threat

Date: Wed, 29th June 2020

Author(s): Sharon Chen, Haze Fan, Heng Xie, Zheng Li, Jun Luo, Dingmin Zhang, and Lucille Liu

Source: Bloomberg


China is getting ready to allow its biggest commercial banks to enter into investment banking and bond and stock deal-making as soon as this year, paving the way for them to take on Wall Street rivals as competition heats up in the nation’s $21 trillion capital market.


Regulators are debating plans to issue these licenses initially to some of the largest lenders of the country, including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., on a pilot basis, said people familiar with the deliberations who asked not to be identified since the matter is private. Policy makers are also contemplating changing the commercial banking law to eliminate the legal hurdle that has stopped lenders from diversifying into securities and futures for decades, said the people.


The possible entry of Chinese banks, which have $43 trillion in assets, into deal making and trading would increase competition for global firms including Goldman Sachs Group Inc. and Morgan Stanley, which have been expanding their operations in China and can this year petition for full control of local securities firms. It will also pose a significant threat to local rivals such as brokerage Citic Securities Co., which saw its stock tumble on the news.


The move would accelerate supply-side reform in the financial sector by eliminating smaller brokers, Citigroup Inc. analysts led by Hong Kong-based Judy Zhang wrote in a note. It also “helps China banks to migrate into a universal banking model, which can boost banks’ non-interest income, thus offset the pressure from falling loan pricing,” they wrote, adding that any earnings boost will be limited.


Even after the banking law is changed, only large banks will probably be considered as qualified and capable of managing the risks around providing securities services, said the people. The opening will be phased and banks will start by underwriting exchange-traded bonds, they added.


China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission didn’t immediately respond to requests seeking comments. Representatives at China Construction Bank and ICBC declined to immediately comment.


Business publication Caixin reported on Saturday that China may offer brokerage licenses to at least two big commercial banks, without giving further details. The CSRC said on Sunday that while it had no information to provide in response to the article, developing high-quality investment banks is an important way to expand direct financing and multiple methods are under discussion. Whichever direction is picked, it won’t have a major impact on the existing industry landscape, according to the statement.

Fragmented Market
China brokerage market is fragmented, with its about 131 brokers having combined assets equivalent to less than a third of ICBC’s. The lender is the world’s largest by assets.


The securities regulator said late last year that it wanted to create investment banks of an “aircraft carrier size” to compete with Wall Street, as well as to promote the international expansion of its brokerage industry. That partly involves mergers between local players. Citic Securities Co. and CSC Financial Co. -- the nation’s biggest brokers -- have started a feasibility study on how to structure a merger deal, people familiar with the matter said in April.


The stakes for banks looking at moving into the brokerage business will at first be comparatively small given their hundreds of billions of dollars of revenue. But a diversification into fee-based services would come at an opportune time as the government urges them to forgo profits from lending to help small businesses reeling from the impact of the virus outbreak.


Shares of brokers declined on Monday. Citic Securities fell 3.1% as of 1:47 p.m. in Shanghai, while Huatai Securities Co. dropped 4.9%.


China’s securities regulator has been weighing such a plan since as early as 2015, when the CSRC said it was studying a proposal to let banks apply for brokerage licenses. Bank of China Ltd. is the only Chinese bank that owns a domestic securities firm, through its Hong Kong-based brokerage unit. BOC International (China) Ltd. was established in 2002.


Global banks and asset managers are ramping up investments in the world’s second-largest economy even as political tensions between the U.S. and China on the coronavirus outbreak and a crackdown on Hong Kong escalate. JPMorgan Chase & Co. was approved earlier this month to take full ownership of its China futures unit, while Morgan Stanley and Goldman were cleared to take majority control of their onshore securities ventures in March.


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