China's 100-odd securities companies will undergo intensified reshuffles this year as the authorities speed up disposal of poor-performers in the industry to build up its competitiveness.

The China Securities Regulatory Commission (CSRC) announced last weekend that some senior executives of eight heavily-indebted securities companies that were taken over by the government or state-run financial institutions in 2004 will be punished for their misconduct in managing these companies.

Those with criminal liabilities will be transferred to the judicial departments for criminal investigation.

The commission will also invite auditors to re-audit the eight companies' financial status before the irregularities were disclosed and previous auditors that gave inaccurate results will be punished.

The eight companies include former industry bellwether China Southern Securities, Yunnan Securities, Liaoning Securities, Minfa Securities, Hantang Securities and three securities firms that were related to the troubled financial conglomerate D'Long Group. They have been hit either by over-loaded debts or scandals such as fund embezzlement and illegal investments.

A source with CSRC said the watchdog intends to complete the final disposal of the eight companies within the first half of the year and further intensify the industry clear-up.

The commission started a nationwide investigation into the country's more than 100 securities firms on their financial status, requiring them to submit detailed financial reports about their liabilities, profits and the use of the clients' assets, and so on, together with concrete plans for further reforms.

More than 80 securities firms have handed in such reports and about one-third of them have passed the regulators examination so far.

The clear-up of the securities industry has become urgent for the securities regulators, as more risks were disclosed during the operation of some securities firms, who embezzled a large account of deposit funds of their clients to make investments and were unable to pay back the money due to investment failures as the stock market continued to fall.

CSRC has insisted that the number of such "high-risk" securities companies was very limited, though they have indeed eroded the image of the overall industry.

Liang Jing, an analyst with Guotai & Jun'an Securities who has been following the securities industry reshuffle, said that regardless of the number of lawbreakers, the securities industry, already suffering from losses for years, is at a crucial turning point as the reshuffle intensifies.

There have been more mergers and acquisitions in the industry, either out of administrative orders or market-oriented practices, he said.

The industry has to be restructured to reallocate the resources. And most importantly, the securities companies have to reposition themselves in the market place and upgrade their internal control, with standard corporate governance to become really efficient, Liang said.

CSRC's role in the restructuring, however, should be more like a referee, experts said.

The commission is trying to build up within the year a new mandatory system of the deposit funds investors put at the brokerages for securities trading, with segregated accounts for such deposits to ensure they are not embezzled by the securities firms.

It also aims to launch a protection fund for securities investors to guarantee compensation to investors in case of the bankruptcy of the securities companies.

But experts said that to implement these reforms and make them really work well, there is still much legislative work to be done, including drafting of laws and regulations that clarify the liabilities of the securities companies on the misappropriation of clients' funds and the standard of compensation.

How to dispose the creditors' rights and other liabilities when a securities company or listed company fall bankrupt also needs to be addressed explicitly.

Without such a legal system, even if China builds up a compensation fund for securities investors, it will still be hard to discipline the securities companies and avoid moral hazard, said Zhong Wei, director of the International Finance Research Center with the Beijing Normal University.

As for internal reforms, the securities firms have to make more efforts to upgrade their profit model, said Zhong.

The faster entry of big global investment banks, such as Goldman Sachs, which is preparing for the launch of a joint venture securities company in the mainland, may bring some changes to the industry. UBS and a number of other foreign companies are also catching up with similar plans.

Their participation in the reshuffle is expected to ratchet up the competition in the sector and may force domestic companies to improve themselves, but it does not offer a magic cure for all, said Liang Jing with Guotai & Jun'an Securities.

"We need more comprehensive solutions and systematic reforms," he said.

(China Daily January 24, 2005)