China Starts Merging State Brokerages, to Create $226bn Giant

China has begun the first phase of a plan to consolidate its state brokerages, with a move to merge two Shanghai entities – Guotai Junan Securities and Haitong Securities.

The move, which aims to create a sector leader with combined assets of nearly $230 billion via a share swap, was announced by the companies late on Thursday.

The deal, which is subject to regulatory and shareholder approval, is part of a drive by Beijing to consolidate the $1.7-trillion industry amid challenging markets. And that process is set to gather pace, analysts said.

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The combined Guotai Junan-Haitong entity should end up with 1.6 trillion yuan ($226 billion) in total assets, and will overtake Citic Securities as China’s largest brokerage.

Trading in shares of Guotai Junan and Haitong was suspended on Friday.

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.

Beijing keen to tighten control of brokerage sector

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.

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 rise on merger news

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

Shanghai-listed shares of CICC leapt as much as 8%, while Galaxy Securities rose as much as 10% 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.