China Urges Big Brokerages to Support Smaller Non-Banks

Chinese regulators are asking the country’s leading brokerages to provide liquidity support to smaller brokerages as the effects of the government takeover of a private bank start to spread to the non-banking financial sector.

The China Securities Regulatory Commission (CSRC) and the central bank Sunday summoned nine leading brokerages and fund managers to discuss ways to address liquidity risks facing the non-banking financial sector in the wake of last month’s seizure of Baoshang Bank Co.

The meeting with top brokerages continues a series of moves to limit the Baoshang fallout. Although the People’s Bank of China has said Baoshang was an isolated case, the takeover has cast a chill over the interbank market and driven up the borrowing costs for smaller banks and non-bank institutions. On Friday, the central bank announced a plan to hand out 300 billion yuan ($43.4 billion) in rediscount and standing lending facility (SLF) quotas to support lending by smaller banks.

Participants in the meeting Sunday were Citic Securities Co., China International Capital Corp., Huatai Securities Co., Guotai Junan Securities Co., China Merchants Securities Co., CSC Financial Co., Orient Securities Co., E Fund Management Co. and China Southern Asset Management Co.

Regulators asked the brokerages and fund managers to provide liquidity support to smaller securities firms and funds. In return, China Securities Finance Co., a state-owned institution that provides margin financing loan services to securities companies, will provide financing to the big brokerages, according to the meeting minutes.

At the meeting, the CSRC also proposed to provide targeted financing support for participating institutions, including relaxing restrictions on issuance of financial bonds and raising the quota of short-term financing bonds. The specific quota will be determined by the central bank and the CSRC.

The central bank said it will coordinate with the five biggest state-owned banks to provide financing to the leading brokerages through the issuance of financial bonds.

The meeting also proposed to allow brokerages to use the liquidity support for their self-operated asset management products and investment advisory products.

Since the Baoshang takeover, it has become increasingly hard for brokerages to get loans using corporate bonds as collateral because the takeover set off jitters in the interbank market. A bond trader at a brokerage told Caixin that banks now won’t take even AA+ bonds of big state-owned enterprises as collateral.

Li Chao, vice chairman of the CSRC, said at the meeting that the effect of the Baoshang takeover has to certain degree spread to the non-banking financial institutions and private enterprises.

“Credit tightening is unavoidable, but it can’t be too volatile and should be smooth,” Li said. He stressed that the meeting aimed to resolve accidental financial damage, rather than to unconditionally protect high-risk institutions.

Li urged brokerages and fund firms to support each other and not to cut off smaller non-banks as counterparties in the interbank market.

The regulators took control of Baoshang Bank last month for a year, citing “severe credit risk” posed by the small Inner Mongolia bank.

The bank relied heavily on the interbank market, where banks borrow from each other, using debt raised from the market to bolster its liquidity, which allowed it to leverage up.

Market participants said the supportive measures will help to ease the market jitters, but policy transmission and market digestion will take some time.

Contact editor Han Wei (weihan@caixin.com)