China Halts Foreign Acquisitions of Brokerage Firms

China Halts Foreign Acquisitions of Brokerage Firms

September 14, 2006

By Josephine Lau and Yidi Zhao

Sept. 14 (Bloomberg) -- China halted acquisitions of brokerages by international firms, sheltering the domestic securities industry from Wall Street's expansion in the world's fastest-growing stock market.

The China Securities Regulatory Commission also said today it would stop issuing licenses and approving new branches to give brokerages time to improve profits. The ban thwarts plans by companies including Citigroup Inc. and Merrill Lynch & Co. to boost trading in China, and leaves Goldman Sachs Group Inc. and UBS AG as the only firms with brokerage ventures in the country.

``Foreign firms would have an overwhelming advantage if they were let in now,'' said Liang Jing, a Shanghai-based analyst at Guotai Junan Securities Co., China's biggest brokerage. ``The government is trying to encourage consolidation by letting the big companies grow stronger, while weeding out the smaller, weaker ones.''

Global firms want access to markets where the average number of shares traded each day through 75 million brokerage accounts more than doubled in the past year. The Shanghai Composite Index surged 41 percent this year, the 10th best- performing in the world. Now, China is reversing efforts to attract foreign capital for local brokerages as the government seeks to maintain control over the country's financial assets.

``The purpose of the rules is to give brokerages room to improve,'' said Shang Fulin, chairman of the securities commission, at a conference today in Xianghe, outside Beijing. ``We just need to give them time.''

Paulson's Visit

The industry's overhaul will be completed by October 2007, he said, without giving a timeframe for when the ban will be lifted.

The announcement from the securities regulator comes a week before Henry Paulson, the new U.S. Treasury secretary and former chief executive officer at Goldman, visits Beijing. Paulson in a speech yesterday in Washington called on China to open its capital markets to competition.

``China deserves recognition for what it has become, but at the same time, China must be more than a beneficiary of open markets,'' he said.

Bob Morse, CEO of Citigroup's Asia unit, said a year ago that the world's biggest bank by market value was seeking ``the right vehicle to participate in the growth and evolution of the domestic securities and brokerage business in China.''

UBS, Goldman

Merrill, the world's largest brokerage, as well as U.S. rivals Morgan Stanley and JPMorgan Chase & Co. and Hong Kong- based CLSA Ltd., the No. 1 independent broker in Asia, also have said they want to establish partnerships.

Spokesmen for the firms either declined to comment today or weren't immediately available.

UBS, Europe's biggest bank by assets, won approval in June to set up UBS Securities Co. in China after a nine-month wait. The Zurich-based firm plans to buy Beijing Securities Co. New York-based Goldman set up a similar venture with Beijing Gao Hua Securities Co. in 2004.

``There's no way China's securities markets can develop without the participation of foreign brokerages or allowing new domestic brokers to set up,'' said Fraser Howie, co-author of ``Privatizing China: The Stock Markets and Their Role in Corporate Reform,'' published in 2003 by John Wiley & Sons. ``Any ban or suspension can only be temporary.''

China's 50 biggest brokerages reported a combined net loss of $562 million in 2004, according to estimates from Xinhua Far East Credit Ratings. The government has been forcing brokerages to merge or close, with the number declining to 143 registered last month with the Shanghai Stock Exchange from 154 at the end of 2004.

Shutting Down Brokers

Nanfang Securities Co. was declared bankrupt last month by a Shenzhen court. Three former heads of the brokerage were arrested in March for alleged stock-price manipulation, the Oriental Morning Post reported. Regulators closed China Eagle Securities Co. in January after the Shenzhen-based brokerage allegedly misused client funds.

Chinese brokerages earned about 4 billion yuan ($503 million) in the first four months of this year, the Shanghai Securities News reported in May, without saying where it got the information.

With stock prices and trading increasing, profits in the brokerage industry probably are improving, said Ivan Chung, Hong Kong-based managing director of Xinhua Far East. ``We may see a slowdown in restructuring efforts as a result of the market turnaround,'' he said.

The value of shares available to trade in China was $213 billion as of yesterday, according to data on the Web site of the Shanghai and Shenzhen stock exchanges. About 3.6 billion local-currency shares traded each day on the Shanghai exchange this year, up from 1.6 billion a year earlier, data compiled by Bloomberg show.

Investors have turned to China's stock markets as the government encourages some of the country's biggest and most profitable companies to sell shares. Bank of China, the nation's second-biggest lender, raised 20 billion yuan in June.