CITIC Securities and China Jianyin Investment Limited (JIC) will work together to take over debt-ridden China Securities, market sources revealed yesterday.

The two brokerages will take over the healthy assets of China Securities after peeling off bad debts held by the beleaguered firm. A new brokerage will be established in which CITIC will own a 60 percent stake while JIC will hold the other 40 percent.

The restructuring will help build a new, high quality brokerage, a senior official at China Securities said.

CITIC Securities is among the top 10 domestic brokers in terms of securities transaction value and gross assets. It ranks No 1 among China's 130-odd securities firms in terms of net assets. Last year CITIC chalked up profits of about 650 million yuan (US$75.6 million).

CITIC Securities had reached the standard set by market watchdog China Securities Regulatory Commission to become a pilot brokerage to enjoy favorable policies for future development and experiment with product innovations.

JIC is solely held by Central Huijin, a wholly State-owned investment company that focuses solely on equity investments in the nation's major financial institutions under the approval of the State Council.

Central Huijin and JIC will become two of the major forces in the reshuffling of China's brokerages by injecting capital into pilot brokerages with capital difficulties.

The brokerage market needs fundamental reshuffling, said Dong Chen, a senior analyst at China Securities.

China has about 130 securities firms, but only a dozen of them have reached the standard of becoming pilot brokerages. About 30 are regarded as well-operated firms. And almost all are suffering from irregularities or have become debt-ridden.

If not restructured, the problematic firms would likely become a source of financial crisis, Dong said.

Moreover, market insiders say when the new brokerage is up and running properly, JIC would withdraw from it and transfer all its shares to CITIC.

CITIC would then merger with the new securities company and form a large one. It is not necessary for CITIC to have two brokerages and the two will compete in many sectors, the insider explained.

China Securities was founded in 1992 when China established its stock market. It is one of the earliest brokerage houses in China and was mainly held by the Beijing Municipal Government.

By the end of June last year, the brokerage had misappropriated about 1.6 billion yuan (US$193 million) of the clients' funds. Its own investments in the stock market also proved defunct due to poor decisions and a sluggish market environment. Altogether the firm shoulders debt of about 6 billion yuan (US$726 million).

Reshuffling is not a guarantee of a healthy brokerage sector, said Yi Xianrong, an economist at Chinese Academy of Social Sciences.

Those responsible for the company's loss-making should be punished and a fault-finding mechanism should be established, he said.

Only when a supervision system is well established and the legal loopholes are plugged can the market can be run healthily, he added.

(China Daily July 19, 2005)