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Chinese Brokers Raise $12.2B in Fresh Capital

by Arnab Shome
  • At least six Chinese brokers are seeking to raise capital.
  • The need for fresh capital is necessary to comply with risk-management rules.
China, futu, tiger brokers
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Chinese brokerages rush to raise billions of dollars in fresh capital to comply with new local rules. According to Reuters, at least six publicly listed Chinese brokers, including China International Capital Corp (CICC) and Huatai Securities, are raising up to 82.5 billion yuan ($12.2 billion) in private placements or rights issues.

Last year, Chinese brokers raised a total of 77 billion yuan via follow-up share sales, according to Refinitiv data. However, the industry is seeking further capital.

Chinese Brokers Are Seeking Fresh Capital

Currently, additional fresh capital is a new requirement of Chinese risk management rules. In 2020, China mandated brokers to maintain a minimum core net capital of 8 percent of the total assets. Further, the quality liquid assets of the brokers must exceed the net cash outflows for the next 30 days, and the brokers must have a stable capital base.

Also, brokers need to finance capital-intensive businesses like margin financing and market-making. Multiple brokers earlier revealed their requirement for capital for business expansion.

The brokers chose to raise capital when the Chinese equities market rebounded by more than 10 percent with a boost from the end of the country's zero-Covid policy. Additionally, global players are bullish on the short-term future Chinese markets as Morgan Stanley expects another 13 percent uptick in the country's equities by the end of 2023.

"The market revival is good news for brokerages as they can choose to sell additional shares at a better price," Xia Chun, the Chief Economist at Shanghai-based Yintech Investment Holdings, told the publication. "Securities firms need capital to transform their business model by reducing reliance on traditional businesses."

Check out the session from FMLS19 on the Chinese Market.

A Bullish Chinese Market

However, the push came after a long-withstanding slump in the market. The Chinese brokerage industry will withstand a 19 percent profit slump in the first nine months of 2022. Now, these companies are moving away from traditional earnings, trading commissions, underwriting fees, and propriety trading and expanding to more stable wealth and asset management businesses.

Moreover, the Chinese government opened the country's gates to western banks to establish brokerage businesses. This has also become a matter of concern for local brokerages.

"The challenge (for Chinese brokerages) is to sustain good performance and that will depend on the government's policy towards capital markets," said Alec Jin, who holds the position of Investment Director of Asian Equities at CICC-parent Abrdn.

"If we see clear signals from the government, backed by policy action, of its intent to liberalize the capital markets, the sector's current valuation is very attractive compared to its long-term potential."

Meanwhile, online brokers, offering Chinese nationals access to foreign stock markets, are facing legal action in the Communist-government-led country. Last month, China's securities market regulator warned Futu and UP Fintech for soliciting investors in the mainland and asked them to take corrective measures.

"Futu will fully cooperate with the CSRC and take all necessary measures to review its cross-border operations in mainland China and to comply with all applicable rules and regulations," the online broker stated in response.

Chinese brokerages rush to raise billions of dollars in fresh capital to comply with new local rules. According to Reuters, at least six publicly listed Chinese brokers, including China International Capital Corp (CICC) and Huatai Securities, are raising up to 82.5 billion yuan ($12.2 billion) in private placements or rights issues.

Last year, Chinese brokers raised a total of 77 billion yuan via follow-up share sales, according to Refinitiv data. However, the industry is seeking further capital.

Chinese Brokers Are Seeking Fresh Capital

Currently, additional fresh capital is a new requirement of Chinese risk management rules. In 2020, China mandated brokers to maintain a minimum core net capital of 8 percent of the total assets. Further, the quality liquid assets of the brokers must exceed the net cash outflows for the next 30 days, and the brokers must have a stable capital base.

Also, brokers need to finance capital-intensive businesses like margin financing and market-making. Multiple brokers earlier revealed their requirement for capital for business expansion.

The brokers chose to raise capital when the Chinese equities market rebounded by more than 10 percent with a boost from the end of the country's zero-Covid policy. Additionally, global players are bullish on the short-term future Chinese markets as Morgan Stanley expects another 13 percent uptick in the country's equities by the end of 2023.

"The market revival is good news for brokerages as they can choose to sell additional shares at a better price," Xia Chun, the Chief Economist at Shanghai-based Yintech Investment Holdings, told the publication. "Securities firms need capital to transform their business model by reducing reliance on traditional businesses."

Check out the session from FMLS19 on the Chinese Market.

A Bullish Chinese Market

However, the push came after a long-withstanding slump in the market. The Chinese brokerage industry will withstand a 19 percent profit slump in the first nine months of 2022. Now, these companies are moving away from traditional earnings, trading commissions, underwriting fees, and propriety trading and expanding to more stable wealth and asset management businesses.

Moreover, the Chinese government opened the country's gates to western banks to establish brokerage businesses. This has also become a matter of concern for local brokerages.

"The challenge (for Chinese brokerages) is to sustain good performance and that will depend on the government's policy towards capital markets," said Alec Jin, who holds the position of Investment Director of Asian Equities at CICC-parent Abrdn.

"If we see clear signals from the government, backed by policy action, of its intent to liberalize the capital markets, the sector's current valuation is very attractive compared to its long-term potential."

Meanwhile, online brokers, offering Chinese nationals access to foreign stock markets, are facing legal action in the Communist-government-led country. Last month, China's securities market regulator warned Futu and UP Fintech for soliciting investors in the mainland and asked them to take corrective measures.

"Futu will fully cooperate with the CSRC and take all necessary measures to review its cross-border operations in mainland China and to comply with all applicable rules and regulations," the online broker stated in response.

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