21 April 2019

Chinese brokers face rising risks on net capital amid stock rout

Chinese brokers may face rising risks on net capital and trading gains as the domestic stock market rout continues.

Losses on brokers’ equity investments made as part of the government’s stock market rescue plan or through proprietary trading may pose capital risks.

The weakening stock market may result in brokers booking reduced investment gains for the second half.

The rescue measures, including contributions by brokers to a bailout fund and pledges to buy their own shares and those of other companies may cost the brokerage industry a total of 240 billion yuan (US$38 billion).

This is equivalent to almost 18 percent of the industry’s net assets and about 21 percent of its net capital, based on June data from the Securities Association of China.

CITIC Securities had more proprietary equity exposure as of June than its four largest rivals.

Its equity holding was 56 percent of net capital, the highest percentage in the group.

The brokerage reported combined exposure of 145 billion yuan in the first half, or an average of 40 percent of net capital, before it took part in a market rescue effort as stock prices fell by 41 percent from their June peak.

Equity holding rose 33 percent in the first six months. CITIC’s equity holding was worth 39 billion yuan as of June.

Investment gains may fade as a revenue driver for brokers after the stock market plunge.

The gains, mostly driven by stocks and investment funds, were 36.4 billion yuan for the biggest five brokers in the first half, exceeding the 2014 full-year level of 28.8 billion yuan.

Gains on investments comprised more than a quarter of first-half revenue in four of the brokerages.

Their combined monthly profits in August fell 69 percent from June after the retreat in China’s markets.

CITIC’s share price has fallen 51 percent in the past three months while Haitong’s has declined by 45 percent.

The targeting of a number of CITIC executives in an insider dealing probe contributed to its price declining more sharply than those of its rivals.

The views expressed in this article are those of Francis Chan, a senior banking analyst at Bloomberg Intelligence

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