China merges two brokerages to create 1.6 trillion yuan giant

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 sector amid a slump in deals.

Guotai Junan Securities will merge with smaller firm Haitong Securities through a share swap, according to statements from both companies on Thursday (Sep 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$293.4 billion), topping Citic Securities as the largest brokerage.

The merger plan is pending approval from the companies’ boards and shareholders, as well as regulatory authorities.

The deal comes a year after 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.

Under the agreement, Guotai Junan will issue shares to be listed on the Shanghai Stock Exchange to holders of Haitong’s A shares, and do the same in Hong Kong with H shares. The company also plans a placement of new A shares for ancillary fundraising.

Both companies will suspend trading in Shanghai and Hong Kong starting on Friday.

The Shanghai State-owned Assets Supervision and Management Commission indirectly holds about a third of Guotai Junan and almost 20 per cent of Haitong, according to their official websites.

The sector has been plagued by a deal slump and sluggishness in 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 and Citic Securities posted drops in first-half results.

Brokerages have also become targets of 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.

China had mulled combining two of its largest investment banks four years ago, but progress has stalled. An earlier proposal was for Citic Group, parent of Citic Securities, to buy a stake in CSC Financial from Central Huijin, Bloomberg reported. BLOOMBERG