In Depth: Can China Create Its Own Goldman Sachs With Brokerage Mega-Merger?

Two of China’s top securities firms, Guotai Junan Securities Co. Ltd. and Haitong Securities Co. Ltd., have announced their plans for a merger. [para. 1] This fusion, driven by the Shanghai government, aims to create a brokerage capable of competing with global giants like Morgan Stanley and Goldman Sachs. [para. 2] However, the deal could take over a year to finalize, raising concerns among analysts and academics about its potential successes and challenges amidst a weak stock market and the ongoing slump in IPOs. [para. 3]

The merger faces significant hurdles, as integrating personnel, institutions, and assets is expected to be a difficult endeavor. [para. 4] A detailed merger plan, including price and terms of a stock swap, is anticipated post the Golden Week holiday beginning on October 1. [para. 5] As the largest merger between two listed Chinese securities firms to date, the process will be intricate, testing various regulatory and compliance measures, including mutual fund ownership caps that may force the divestment of certain operations. [para. 7]

China's capital markets, while substantial, are not on par with U.S. bond and stock markets. Even the biggest Chinese securities firms are much smaller compared to U.S. giants like JPMorgan Chase, Goldman Sachs, and Morgan Stanley. For instance, Citic Securities, China’s current largest securities firm, had assets valued at $205.2 billion, compared to Goldman Sachs’ $1.64 trillion and JPMorgan’s $3.88 trillion by the end of last year. [para. 10] This discrepancy is attributed to regulatory differences, ownership structures, and business models, including China’s Commercial Bank Law of 1995, which separates securities and commercial banking activities. [para. 11]

Most Chinese securities firms focus on domestic operations with limited presence in offshore markets, whereas U.S. banks have global reach and a broad range of services primarily aimed at institutional clients. [para. 12] Despite this, the Chinese government is pushing for consolidation within the securities industry to better compete with foreign firms, particularly following the lifting of certain ownership caps in 2020. [para. 13] The Central Financial Work Conference of October and subsequent moves by the China Securities Regulatory Commission (CSRC) have emphasized fostering top-tier investment banks. [para. 14]

Shanghai's local government is keen on housing one of these globally competitive firms. Both Guotai Junan and Haitong headquarters are in Shanghai, where officials are promoting the development of large, competitive securities firms, as suggested by President Xi Jinping. [para. 18] Metrics based on end-of-2023 asset valuations predict the merged firm will surpass Citic Securities, assuming no other changes, though achieving operational synergy remains debatable. [para. 29]

There are significant concerns that the merger mainly serves to rescue Haitong from its financial troubles. Haitong has witnessed an 84.6% drop in net profit in 2023 and continued financial struggles have been compounded by leadership issues. [para. 33] The firm’s aggressive domestic and international business strategies have led to an increase in bad debts and operational penalties. [para. 36]

Even after the merger, questions remain about the ultimate benefit, especially for Guotai Junan, though the consolidation could potentially lower financing costs. [para. 39] Nonetheless, the merger alone may not address the broader issues within China’s securities sector, such as similar business models across different firms. [para. 42]

An anonymous finance professor highlighted that instead of trying to emulate U.S. investment banks, Chinese investment banks should focus on improving their unique strengths to optimize their market potential. The different characteristics of the market systems explain why U.S. investment banks are large while China's commercial banks are more dominant. [para. 44] The primary goal should be evolving China’s securities firms to better versions of themselves. [para. 45]