BEIJING (TIP)- China is combining two of its largest state-backed brokerages to create a new behemoth as it seeks to consolidate the US$1.7 trillion (S$2.2 trillion) sector and build stronger investment banks to compete with overseas financial firms. Guotai Junan Securities will merge with smaller rival Haitong Securities through a share swop, according to statements from both companies on Sept 5. The combination of the brokerages, both partly owned by Shanghai’s state assets administrator, will create a new entity with assets of 1.6 trillion yuan (S$293 billion), topping Citic Securities as the largest brokerage.
The merger is pending approval from the companies’ boards and shareholders, as well as the regulatory authorities.
The deal comes a year after China’s President Xi Jinping urged regulators at a finance conference to cultivate a few top-ranked investment banks to compete with Wall Street firms expanding in China.
The nation’s securities watchdog also voiced its support in March for consolidation in the sector, with a goal of having two to three investment banks that can compete globally by 2035. China had about 145 securities firms at the end of 2023, with combined assets of 11.8 trillion yuan according to official data.
“The combination is conducive to building a first-class investment bank and promoting the high-quality development of the industry,” according to the statements.
Haitong, valued at HK$106 billion (S$17.7 billion) in Hong Kong, reported a 75 per cent decrease in profit for the first half, while its shares are down 12 per cent on the year.
“The merger will potentially resolve” Haitong’s business concerns, Hua Chuang Securities said in a report.
“The overall quality of the underlying assets is not very healthy, which also leads to the low valuation,” it said, adding that the merger may also lead to job cuts with the industry hit by a drought of companies going public.
Guotai Junan has about 15,000 employees, while Haitong Securities employs more than 13,600, including 1,645 at investment banking.
The sector has been hampered by a slump in deals and sluggish capital markets as stocks flounder on weak economic growth. Profits have declined in the past few years, and the outlook for earnings remains bleak after industry heavyweights China International Capital Corporation and Citic Securities posted declines in first-half results.
Brokerages have also become targets of Mr Xi’s signature “common prosperity” campaign, resorting to pay cuts and layoffs to consolidate businesses and comply with tighter scrutiny.
The deal would mark a big step in China’s years-long ambition to create an “aircraft carrier-sized” brokerage to take on Wall Street banks after it gradually opened up the financial markets to allow full foreign ownership in 2020.
Source: BLOOMBERG