The government plans to halve the number of securities brokers by the end of the year.

 

As the number of brokers is reduced, a dozen powerful players will be assisted in consolidating their strength in the opening sector.

 

"Only around 50 qualified brokers will survive in the market, the others will have to quit trading or be purchased," He Jiawu, a director of the Securities Association of China (SAC), said yesterday.

 

Currently the China Securities Regulatory Commission (CSRC) and the SAC have qualified 32 brokers, meaning around 90 firms are left competing for the last 18 available qualifications.

 

Brokers without qualifications will be banned from the securities trade after 2006, according to He.

 

"Actually, the CSRC has already set October 1 as the deadline for brokers to meet certain requirements, otherwise, they will have to quit the business," an industry source told China Daily.

 

In order to qualify, securities firms must return any money they have embezzled from clients' deposits, they must not have heavy debts and their net capital must meet certain standards.

 

Securities firms will also have to submit monthly reports on their net capital and risk controls.

 

"The requirements are quite strict, considering many brokers' current situation," said Dong Chen, an analyst with CITIC China Securities. "Brokers who don't meet the requirements will have to restructure or quit the industry forever."

 

The regulator has taken over or shut down more than 20 securities firms over the past three years, because of irregularities such as misappropriation of clients' funds, illegal acquisitions and mismanagement.

 

And its drive to clean up the industry will intensify in the second half of this year, as the government tries to turn the securities business into a healthy industry.

 

In the current pressurized environment, securities firms are busy restructuring or seeking support from local governments and major shareholders.

 

"Those that can seek outside support to strengthen themselves will stand a chance to survive. Those who fail will have to be purchased by others," said Dong.

 

He said that acquisitions between security firms would enhance the centralization of the sector's capital and resources, help to lower transaction costs and reduce competition.

 

"With more than half the players withdrawing from the market, a dozen powerful firms could grow stronger and become the main forces in the sector."

 

The restructuring of the industry has helped strengthen soundly performing brokers' business, especially after the government resumed IPOs and other capital-raising activities in the domestic stock market, which generate business opportunities for securities brokers.

 

Twenty-six brokers have disclosed interim reports, with all enjoying gains in the first half of the year.

 

Up until July 18, eight leading brokers, including Orient Securities, Huatai Securities, Guodu Securities, China International Capital Co Ltd, Guoyuan Securities, Donghai Securities, Ping An Securities and Everbright Securities, have published 2006 interim reports.

 

The eight leading brokers demonstrated a combined net profit of 2.1 billon yuan (US$ 262.5 million) seven times of their combined net profits last year.

 

To compare, only China International Capital Co Ltd realized a profit gain in the first half of 2005, and others suffered a combined loss of 150 million yuan (US$18.75 million) in the same period.

 

CITIC Securities, another leading broker, predicted on Monday that its net profit for the first half of the year will reach around 100 million yuan (US$12.5 million), a 50 percent increase on the same period last year.

 

Yi Xianrong, a professor with the Chinese Academy of Social Sciences, however, said the government should not limit the number of qualified brokers to around only 50.

 

"I suggest brokers should gradually quit the industry. It should be a natural wash out by the market, instead of administrative measures," said Yi.

 

(China Daily July 20, 2006)