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China mulls brokerage licences for two investment banks

(ATF) ICBC and China Construction Bank look likely to be the first Chinese banks to be issued a brokerage license, according to Jin Qilin research, the China Finance Association, Caixin and Sina Finance. Their reports say officials are considering awarding pilot brokerage licences to two banks.

China tried a mixed operation model in the past, but it fell into chaos. However, as the system matures and leaders push to develop China’s financial sector, this new move is being pondered as a way to give China a system that is compatible with leading capital markets.

The possibility of a mixed operation of banking and securities has been a topic of speculation in the Chinese market. A spokesperson for the China Securities Regulatory Commission gave a cautious response on the issue, saying, “judging from the experience of the United States, the mixed operation of banks is the general trend. Although the business level [in China] is very mature, it still needs to be carefully studied at the institutional level and the regulatory level.”

The main issue is which banks will be chosen for a test run of this process, and ICBC (the Industrial and Commercial Bank of China) and CCB (China Construction Bank) are currently seen as the most likely candidates. From a business perspective, the pilot of an investment banking business may be the first step.

China Banking News said today – July 2, 2020 – that ICBC and CCB topped a list of the world’s leading lenders, in terms of tier-1 capital and profit.

But neither ICBC nor CCB’s share price was moved by recent stock market activity. CCB rose slightly by 0.48%, while ICBC fell slightly by 0.2%.

According to Caixin reports, the Securities and Futures Commission is planning to issue a pilot license to at least two commercial banks so they can also operate as securities firms.

On June 28, a spokesperson for the China Securities Regulatory Commission stated that there is currently no more information to notify the market about.

The development of a high-quality investment bank would implement the needs of the State Council’s decision-makers to help promote and expand development of the country’s capital markets, which are seen as an important means of direct financing.

But there are multiple options on how to proceed, which are still under discussion. No matter what method is adopted, it will not have a big impact on the existing industry.

In fact, the domestic financial industry has tried the mixed mode of banking and securities since the 1980s, and many risks and some chaos was gradually exposed.

The Commercial Banking Law promulgated in 1995 formally established that commercial banks shall not engage in securities business. Article 43 of the Law, which was amended in 2015, says that “Commercial banks shall not engage in trust investment and securities business within the territory of the People’s Republic of China, or invest in non-self-use real estate or non-bank financial institutions and enterprises – unless otherwise provided exception by the state.” This last phrase reserved policy space for the mixed operation of a bank and trading securities.

According to Caixin reports, there was a discussion on breaking the supervised model of separate industries in 2015. The China Securities Regulatory Commission (CSRC) formally invited and hoped that ICBC would take the lead in a pilot operation project. ICBC reported the investment bank pilot program to the CSRC at the end of 2018.

The US experience

Judging from the experience of the United States, the US has gone through the process of mixing, dividing, and then mixing these financial operations. Affected by the economic and financial crisis in the 1930s, the US Congress passed a law in 1933, which formally established a system of separate operations, which is equivalent to the establishment of a “firewall.” Later, financial regulation was gradually relaxed, but there is still a clear line between commercial banks and investment banks.

In 1998, the US Congress passed the “Financial Services Industry Act of 1998”, which clarified that financial holding companies can own a business of commercial banks, investment banks, and insurance companies. The financial industry adopted a mixed business model. In 2000, the “Financial Service Modernisation Law (Implementation Rules)” was passed to comprehensively promoting the mixed banking business model.

Conjecture on the mixed banking and securities industry in China is a common topic.

“On the one hand, indirect financing is difficult to adapt to the new social investment and financing needs. Banks must also get rid of excessive dependence on deposits and loans. It is difficult to adapt to international competition,” an analyst from the Financial Association said.

Why is this happening?

Why is China reconsidering the mixed banking and securities industry model?

Shen Meng, executive director of Xiangsong Capital, said: “Currently, commercial banks have a narrow scope of business supervision, which limits the development of commercial banks. Moreover, commercial banks have more resources to connect with enterprises and have capital advantages. Basically, there is an investment banking department attached to it, and the pilot issuance of brokerage licenses is only to standardise and make this part of the business transparent and bring it under supervision.”

Referring to the impact on banks and securities firms, Shao Yu said: “Banks will have more direct financing business opportunities, but they are more likely to be adjustments to existing businesses, such as cutting bonds or equity issuance. This also puts greater competitive pressure on the head brokerages. The head brokerages may merge small and medium-sized businesses.”

Shao Yu said: “Banks are mainly based on a debt culture, and securities companies mainly have an equity culture. These two cultures can be said to be very different. Then what standards are adopted by the supervisors to unify supervision and avoid arbitrage? This is very important. Commercial banks need equity culture to adjust their business logic. If they promote financial transformation and support the real economy, it is welcome. The market and industry are waiting for the window of change. The general trend is still direct financing will rise, indirect financing will fall.”

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.

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