Caixin Insight: Proposed Brokerage Tie-Up Foreshadows Wave of Consolidation

Guolian-Sinolink merger has limited influence on the whole securities industry

Guolian Securities and Sinolink Securities announced their proposed tie-up on Sept. 20 in separate statements. According to the announcement, Guolian will buy a 7.8% stake in Sinolink from its privately owned controller and pay for the remainder through an A-share swap. It’s the first publicly announced deal in an expected wave of consolidation as the industry gears up to compete with global investment banks such as Goldman Sachs Group Inc. and UBS AG after China opened up the securities market to overseas institutions.

State-owned Guolian, which only listed on the Shanghai Stock Exchange market two months ago, is currently 40th in a ranking of 48 listed brokerages based on its semi-annual report. It had total revenue of 0.82 billion yuan ($120.1 million) in the first half of 2020; Sinolink was ranked 21st with total revenue of 2.9 billion yuan.

Many market analysts described this deal as “a snake swallowing an elephant,” but as the Matthew Effect in China’s securities industry has become increasingly evident, the top 10 securities firms account for 70% of the industry's net income. There is therefore no big difference between medium-sized brokerages ranking between 20 and 50, and the merger can be considered a relatively even match. However, even if the deal succeeds, their combined revenue of 3.7 billion yuan can only propel the merged company to a ranking of No. 16 in the securities industry so there is still a long way to go to become a leading brokerage. In addition, since the deal is still in its early stages and there are still many uncertainties, the influence of this merger remains to be seen (link in Chinese).

Since early this year, China’ s regulators have encouraged mergers of securities companies to create stronger players, as the majority of China’ s firms are small, regional outfits with neither the financial strength nor the national presence to compete against foreign market entrants. The Guolian-Sinolink merger could help consolidate financial resources and promote the healthy development of the securities industry, analysts at Guosen Securities said in a report.

What will the new free-trade zones do?

The State Council on Monday announced plans to set up more free-trade zones (FTZ) in Beijing, Hunan and Anhui, and double the size of the Zhejiang FTZ. Each of the FTZs has a particular focus:

- Beijing: new policies focused on financial opening, as well as services trade and the digital economy, including

- allowing banks in the zone to issue overseas yuan-denominated loans to foreign institutions’ non-resident accounts (NRAs), a special type of account opened with Chinese mainland banks by overseas entities and individuals

- serving as a testing place for a digital currency developed by the People’s Bank of China

- setting up a “negative list” for trade in services, further opening market access for foreign businesses

- Hunan: split across the cities of

- Changsha: Belt and Road, China-Africa trade cooperation, and the “air-facing economy” focused on industries related to flow of air cargo and transit, among others

- Yueyang: Yangtze economic belt development, focusing on development of shipping logistics and e-commerce, among others

- Chenzhou: Greater Bay Area development, focusing on non-ferrous metal processing and logistics, as well as building a platform for industry transfer to inland areas and upgrading of processing trade, among others

- Anhui: split across the cities of

- Hefei: high-end manufacturing, integrated circuits, AI, etc.

- Wuhu: smart cars, smart appliances, robotics, etc.

- Bengbu: silicon-based materials, biomaterials, new energy, etc.

- Zhejiang: industrial internet and new infrastructure, with focal points in

- Ningbo: international shipping hub linking domestic and international “cycles” (see our Aug. 20 newsletter discussing the dual circulation strategy for more) and supporting supply chain innovation

- Hangzhou: experimenting with next-gen AI, fintech and e-commerce technologies, especially cross-border e-commerce

- Jinyi district of Jinhua: creating a “world capital of small commodities” supported by centers for international small commodity free trade, digital trade innovation, manufacturing innovation, etc.

PBOC, SAFE remove exchange limit

On Sept. 21, PBoC and SAFE jointly issued draft (link in Chinese) "Regulations on the administration of funds for overseas institutional investors to invest in China’s bond market,” for public comment until Oct. 20. It is meant to simplify and consolidate rules in an effort to drive participation of foreign investors in China’s bond market.

The new scheme removes the restriction on the proportion of single-currency (RMB or foreign) investments remitted, and if foreign institutional investors invest with both RMB and a foreign currency, only certain matching requirements will be imposed on foreign currency remittance, with the proportional limit relaxed from 110% to 120%. In terms of spot foreign exchange settlement and sales, the new rules cancel the restriction that foreign institutional investors must handle such procedures via agents, instead allowing qualified Chinese financial institutions to handle them on their behalf.

Wang Hongying, director of the China Financial Derivatives Investment Institute, said the rule changes represent a big step in further opening China's financial market, which will further ease foreign investors' concerns over capital controls and attract more foreign investors to China's bond and A-share markets, facilitating integration of China's capital market into the global financial system.

Cross-border RMB policy changes

On Sept. 18, PBoC, NDRC, MOFCOM, SASAC, CBIRC and SAFE jointly issued draft guidelines on further optimizing cross-border RMB policy and stabilizing foreign investment and trade, as part of the country’s ongoing efforts to promote the currency’s internationalization and support economic recovery. China will make it easier for firms to make cross-border RMB settlements on foreign trade and improve management of cross-border RMB investment and financing, according to draft guidelines.

This move comes as global trade friction has increased volatility in foreign exchange markets and the cost of using third-party currencies has increased. It also comes as China decides to continue opening domestic financial markets to enable the RMB to better compete with other major currencies, as the RMB makes up just a fraction of global transactions and investment. The RMB’s share in global payments stood at 1.76% by end of June, according to a report released by the China Banking Association.

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