China plans to create its own Goldman Sachs

SHANGHAI - China is rolling out sweeping brokerage reforms to nurture future global investment banks that officials hope could eventually compete with the likes of Goldman Sachs and Morgan Stanley, a regulatory document showed.

The China Securities Regulatory Commission wants to allow domestic brokerages, which now get most of their money from trading stocks and underwriting new securities, to expand in futures and derivatives, asset management, private banking and private equity, according to a commission document distributed to securities firms earlier in the month.

Chinese brokerages such as CITIC Securities Co and Haitong Securities Co are still minnows compared with global giants, and will also need freer and more developed capital markets at home and consolidation of their fragmented sector before they are likely to develop global scale and reach.

But the broad reforms planned by the securities regulator, to be implemented after a comment period, could mark the start of a shake-out and expansion drive similar to what set today's international leaders on their path to growth, analysts said.

"It seems Chinese regulators are hoping to copy the US model of development for the brokerage industry," said Tian Liang, analyst at Guosen Securities.

"What's happening in China is very similar to the situation in the mid 1970s in the United States ... And if you look at what drove industry growth in the US, such as the OTC market, junk bonds and the fixed income market and derivatives, those are the businesses Chinese brokerages are being encouraged to go into."

China's brokerages will also be allowed to take on twice as much debt in relation to their net assets, and will be given easier access to the capital markets to support expansion.

Shares of China's handful of listed brokerages, such as CITIC Securities and Haitong Securities, have surged so far this year on expectations surrounding the reforms, but analysts warn not all will benefit.

China has also stepped up market and financial reforms to free up its tightly controlled currency trade and stamp out abuse in stocks and other markets, as it aims to make Shanghai a key global financial center by the end of the decade.

Global stage

But the road to the global stage will be a long one, with total assets of China's entire brokerage sector at $261 billion at the end of last year, barely one-fourth of Goldman Sachs' $944 billion.

"(China's brokerage sector) still hasn't developed core competitiveness compared with leading global investment banks as well as domestic financial institutions such as banks and trust firms," the CSRC said in the proposals.

"The experience from China's opening of banking and other industries has demonstrated that internationally competitive companies will more likely emerge from fully deregulated and highly competitive industries," the CSRC said.

Uncertainties over the speed of reform and ever-changing market conditions make it difficult to predict who would emerge as the winners in a looming industry shake-out, analysts say, although consolidation appears inevitable.

"The reality is we have too many brokerages in this country," Jerry Lou, head of Global Capital Markets at Morgan Stanley Huaxin Securities, the Wall Street bank's Chinese securities joint venture, told Reuters in a recent interview.

"In a more competitive environment, I think consolidation will happen."

Most of China's 106 securities houses have been hit hard by a sluggish stock market and a drop in initial public offerings, cutting the sector's combined net profit nearly in half last year.

Ambitious players are keen to grab a dominant position, with mid-sized brokerage Ping An Securities Co, part of the Ping An Insurance Group which has broadcast its ambition to become a financial conglomerate, rising to the top ranks on China's IPO league table.

CITIC Securities, China's largest listed brokerage which has been eager to expand overseas, said in March that it was in talks to buy the CLSA unit of French bank Credit Agricole. In 2008, it dropped a deal to buy into now-bankrupt Bear Stearns.

The CSRC document, which was seen by Reuters, shows that regulators plan to slash the investment threshold for brokerages' wealth management products for individuals to 10,000 yuan from 50,000 yuan, boosting their investor base.

Brokerages hold only a 2 percent share of China's wealth management business, which is dominated by commercial banks.

Regulators will also allow brokerages to buy spot gold and derivatives, financial and commodity futures, interest rate forwards and swaps, and encourage them to launch alternative investment products.