Haitong Securities aims to become a leading investment bank

Chinese regulators have taken many bold measures to reform the country's large banks over the past decade. However, not much consolidation has been made among the securities houses and little has been done to rescue the ailing ones. Many of China's roughly 107 brokerage firms are riddled with mismanagement and losses, and their profits are decided by the performance of the country's stockmarket.

Brokerage firms envy their banking cousins for their increasingly important international position, and they are trying to catch up with their ambitious plans.

"There are Chinese names that appear on the world's top-10 list of banks and insurance companies but there aren't any Chinese investment banks on the list. We hope to be on that list, that is our target," Lin Yong, chief executive officer of Hai Tong (Hong Kong) Financial Holdings, a subsidiary of Haitong Securities, said in a recent interview with FinanceAsia.

Haitong took a controlling stake in Hong Kong's Taifook Securities last year in a deal analysts described as "expensive". The Shanghai-listed stockbroker paid HK$1.822 billion ($235 million) for a 52.86% stake in its Hong Kong counterpart, whose businesses include brokerage, asset management, market research and investment banking.

"We hope to become a leading investment bank in the world and the integration with Taifook Securities will help us approach that target; there will be significant progress in the second half of this year," Lin said. Taifook Securities will be renamed "Haitong International" to symbolise the group's global development strategy, he added.

Founded in 1988, Haitong is one of the oldest brokers in China and it is also the first mainland brokerage house to acquire a Hong Kong securities house. Although Taifook is seemingly very big for Haitong to take over, it would have been easier for Haitong to seal a pure business deal with an overseas firm than with a domestic one, as the latter often involves political wrangling, analysts say. The reason, they add, is that many securities firms are ultimately owned by regional governments.

Haitong's move has been followed by Citic Securities, which has agreed to combine its global brokerage and investment banking businesses with Credit Agricole as the Chinese firm strives to bring in Western brokerage know-how and at the same time grow its business offshore. Under the agreement, CLSA, which is 65% owned by Credit Agricole, will enter into a joint venture with Citic Securities for research, broking and equity capital markets businesses in China.

All the leading 20 mainland brokerage firms have set up operations in Hong Kong as part of their expansion moves, according to Haitong's Lin.

He said the procedure of underwriting an initial public offering in China's A-share market is very different from doing an IPO in Hong Kong. "When I was taking care of Goldwind's A-share sale in Shenzhen (in 2007), all we did was file what the stock exchange required. We didn't get involved in investor education or gauging investor demand. The shares sold out even before I realised who they sold to," Lin said.

China has huge market potential for brokerage business. It has trillions of yuan in domestic deposit accounts and thousands of fast-growing companies thirsting for capital. Brokers and investment banks would benefit a lot if they could successfully bridge the two by building healthy and prosperous equity and bond markets, experts say.

"Some funds can raise Rmb6 billion ($877 million) or even Rmb8 billion within a single day. That could only happen on the mainland. But many funds in the country have limited investment channels," said Peter Wong, deputy chairman and managing director at Taifook.

China's stockbrokers and investment banks have progressed much slower than the country's lenders over the past decade. Some critics say the government has been too preoccupied with rescuing the banks and hasn't done enough for the ailing stockbrokers. Others think the price war has hindered development.

"Some players win clients by simply reducing fees. That's very bad for the industry. If you don't respect the value of your service how can you expect other people to respect you?" said an industry insider.