Stock brokerages seek to raise $6.2b with IPOs

Chinese stock brokerages are seeking to raise more than $6.2 billion from initial public offerings as capital constraints squeeze their operations.

Guotai Junan Securities Co, China's third-largest brokerage by revenue, is among six securities firms awaiting approval for an IPO, according to filings posted on the website of the China Securities Regulatory Commission.

They will be competing with about 600 companies seeking capital in a market where equities are trading near record-low valuations.

The IPO plans highlight the brokers' quest for capital to fund an expansion into new businesses and avert what Guotai Junan terms "a survival crisis" for the industry.

China's securities firms, which make most of their money executing trading orders for retail clients, have seen profitability plunge to about one-eighth of 2007 levels as trading commissions drop amid investors' disenchantment with equities.

"Now is definitely not a good time to seek listings," said Fanny Chen, a Hong Kong-based analyst at Haitong International Securities Group.

"But for Chinese brokerages, low valuations aren't the biggest concern as they're badly in need of capital."

The firms need the funding for new, capital-intensive services such as offering clients securities lending and margin financing. Lending securities to clients is crucial for brokerages to facilitate short selling, or the sale of borrowed securities. Margin financing allows investors to purchase securities using credit.

Reviving the firms' profitability and allowing their entry into these new businesses is vital for the development of capital markets in the world's second-largest economy at a time when Chinese companies need financing and advisory services to further their global ambitions.

The CSRC said on May 29 that it intends to "build modern investment banks" that are competitive and influential globally.

"If China wants to be a credible financial center and capital market moving forward, the ability to offer a full range of financial instruments is going to be essential," said Bonn Liu, a Hong Kong-based partner at accounting firm KPMG China. "As Chinese companies become bigger and more global, it makes logical sense that the investment banking industry will follow suit."

Policymakers in China historically have given most of their attention to the commercial banking industry, which is dominated by government-controlled lenders. As a result, brokerages, many of which are also State-owned or backed, accounted for 0.8 percent of China's 192.9 trillion yuan ($31 trillion) in financial assets at the end of 2013, compared with banks' 78 percent share, according to central bank data.

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