China's new move to take on Wall Street: A $230 bln brokerage powerhouse

The merger of two state-backed brokerages in China to create a sector leader with $230 billion in assets is part of Beijing’s drive to consolidate the $1.7-trillion industry amid challenging markets, and the move is set to gather pace, analysts said.

Shanghai-based Guotai Junan Securities is set to acquire its cross-town rival Haitong Securities via a share swap, the two companies said late on Thursday.

The deal is subject to regulatory and shareholder approval.

The combined entity, with 1.6 trillion yuan ($226 billion) in total assets, will overtake Citic Securities as China’s largest brokerage. Trading in shares of Guotai Junan and Haitong was suspended on Friday.

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Both Haitong and Guotai Junan are controlled by companies running state assets for the Shanghai government.

Under the deal, Guotai Junan plans to issue new shares to investors in Haitong’s mainland China and Hong Kong listed shares. Guotai Junan will also issue new shares in the onshore market to raise funds for the deal, exchange filings showed.

The consolidation of China’s brokerage industry is expected to accelerate, with the focus on firms backed by the state shareholders, Huatai Securities said in a research note.

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Beijing has dialled up rhetoric about the need for reform in the brokerage sector, with new directives to encourage mergers and acquisitions and restructuring in an industry in which more than 140 Chinese and foreign players compete.

China’s securities regulator said in March that it aimed to develop about 10 leading institutions in about five years, with two to three internationally competitive investment banks and institutions by 2035.

Since the end of last year, there have been announcements about M&A between six pairs of smaller brokerages, including, according to official Shanghai Securities News, the merger of Ping An Securities and Founder Securities.

The latest announcement comes three months after Shanghai Communist Party Secretary Chen Jining urged Guotai Junan to “march toward becoming a globally competitive and influential investment bank” during a visit to the brokerage.

The deal would also fuel market expectations of more mergers and acquisitions, including potential deals between CICC and Galaxy Securities, according to Xu Kang, an analyst at Hua Chuang securities.

Other possible mergers include a combination of Citic Securities and China Securities, Xu said.

Spokespersons for CICC, Galaxy Securities, Citic Securities, and China Securities did not immediately respond to Reuters requests for comment.

Shares jump

Shares of Chinese brokerages jumped on Friday on the merger news. An index tracking China-listed brokerages opened 2 per cent higher, while the CSSW Securities Index rose as much as 2.2 per cent.

Shanghai-listed shares of CICC leapt as much as 8 per cent, while Galaxy Securities rose as much as 10 per cent to a two-month high.

Market volatility and dwindling initial public offerings and other capital market deals in a slowing economy have been weighing on the sector’s earnings.

The latest merger could send a positive signal to the market that the “supply-side reform” in the sector was about to take place due to challenging market cycles and a tightened regulatory landscape, Morgan Stanley said in a research note.

“In the near term, we believe the announced deal could revive some investor interest in broker stocks generally, especially those with potential M&A stories,” analysts at Morgan Stanley wrote.

($1 = 7.0921 Chinese yuan)