How Far Is One Brokerage Giant From Becoming a Top Investment Bank?

The recent merger of Guotai Junan Securities and Haitong Securities signifies a pivotal moment in China's capital market, aiming to establish a "carrier-class" brokerage giant [para. 1]. Announced on September 5, 2024, this "A+H" dual-market merger, the largest in China's history, is set to eclipse CITIC Securities in total assets and net assets, with their combined revenue and net profit ranking among the industry's top three [para. 2][para. 3].

The Chinese stock market has outgrown Japan’s, becoming the world’s second-largest after the U.S. since 2014; however, Chinese securities firms have lagged behind global counterparts like Goldman Sachs and Morgan Stanley. CITIC Securities, China’s largest, has net assets and profits one-fifth of Goldman Sachs and is absent from the Global Systemically Important Financial Institutions list [para. 4]. To bolster the industry's global standing, China has pursued mergers of top firms like CITIC Securities + CSC Financial and CICC + Galaxy Securities, aiming for rapid scaling and strength enhancement [para. 5].

The merger between Guotai Junan and Haitong is seen optimistically by some as a solution to Haitong's troubles, offering Guotai Junan resource consolidation and strength augmentation. Both firms, part of Shanghai’s state-owned assets system, will achieve more efficient industry consolidation, risk mitigation, and synergy, hoping to result in a "1+1>2" effect [para. 6]. Conversely, some argue mergers alone cannot narrow the competency gap with foreign counterparts, and historically, mergers through administrative means have often fallen short of expectations [para. 7][para. 8].

Despite the aim of setting a leading example, the industry still faces issues like a single business model and severe homogenization. Thus, merging alone may not resolve these inherent issues [para. 9][para. 10]. Additionally, there's a significant gap in business philosophy, governance, and compliance between Chinese and top global investment banks, rooted in distinct financial systems: China’s bank-oriented versus the U.S.'s market-oriented model [para. 11][para. 12].

The merger’s completion hinges on internal decisions and regulatory approvals, with uncertainties remaining [para. 13]. Haitong's performance significantly declined recently, primarily due to losses in its international business subsidiary, Haitong International, highlighting internal management weaknesses [para. 14][para. 15]. Hastened by this decline, the merger aligns with national strategies to build top-tier investment banks, pooling resources for anticipated competitiveness enhancement [para. 16].

Though the merger is seen by some as a ‘rescue’ of Haitong, both firms must deal with the complexities of integrating operations and addressing risks within subsidiaries like Haitong International and Haitong Unitrust [para. 17][para. 18]. Guotai Junan must navigate acquisition prices, goodwill, and asset risks [para. 19][para. 20]. The combined entity still trails CITIC Securities, though the merger could help lower financing costs and expand business operations [para. 21].

Personnel integration poses additional challenges, including potential layoffs and restructuring within Haitong Securities [para. 22][para. 23]. Public fund subsidiaries may face trade-offs, with some assets likely to be sold off [para. 24]. Lessons from U.S. investment bank mergers highlight the importance of strategic, complementary mergers driven by market demand, contrasting with the current merger's administrative impetus and its associated risks [para. 25][para. 26].

U.S. examples also show that market-driven mergers, notably under financial crises, often aim to maintain systemic stability. However, they also lead to high industry concentration and systemic risk, a cautionary tale for China’s pursuit of creating brokerage giants [para. 27][para. 28].

As China, particularly Shanghai, pushes for creating leading financial institutions, the merger between Guotai Junan and Haitong Securities stands as a landmark attempt to consolidate and streamline the industry, although it remains to be seen whether it can achieve sustainable competitiveness and efficiency in the long run [para. 29][para. 30].