China’s stock reforms should benefit brokers most

May 3, 2012

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

China’s stock market is reforming fast, but investors hoping for higher stock prices may be disappointed. New chief securities regulator Guo Shuqing took office just half a year ago, but has already brought in a slew of new rules. The latest is to lower trading fees. The aim may be to pep up valuations across the market, but the biggest beneficiaries are likely to be China’s brokerage firms.

Chinese stocks need a boost of some sort. They trade at a discount to Asian peers, and the lowest multiple of forward earnings since late 2008. But investors are still staying on the sidelines. Bank deposits in China are equal to 3.6 times the country’s market capitalisation, according to Citi, far higher than other Asian countries. Earnings growth has disappointed as the economy slows, but new supply of stock keeps coming. Accounting and insider trading scandals have further eroded faith in the market.

The new rules are supposed to make investors feel safer. The China Securities Regulatory Commission has called for more comprehensive dividend policies, broadened delisting regulations, and disclosed previously secret approval procedures for new stocks. But enforcement is still weak. The power to delist companies is rarely used. Vested interests, such as local governments who may own stakes in listed companies, are strong.

In the short term, it’s China’s struggling brokerages who will benefit. That industry’s total profits fell 49 percent in 2011, hit by declining trading volumes and lower underwriting revenues, according to the China Securities Association. The CSRC promised to allow more derivative products, build an over-the-counter market for high-tech stocks, and cut the transaction fees collected by the exchanges. For companies like Citic Securities, and newly Hong Kong-listed Haitong, those measures should help drive up trading volumes, bring new businesses for brokerages, and lower their costs.

Chinese securities firms may have started to turn the corner. First-quarter profit was already an improvement on the previous three months, and the more reform the regulator brings in, the faster that trend should run. But when it comes to valuations in the market overall, there’s no quick fix.

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