Shanghai corporations to merge to create China’s largest brokerage | USAEMALL.com

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Two of China’s biggest state-backed brokerages are to merge, creating a group with assets of $230bn that will lead a domestic industry under growing pressure to consolidate against a weaker economic backdrop.

Haitong Securities will merge with Guotai Junan Securities through a share swap that is subject to regulatory approval, according to announcements late on Thursday.

The combined assets of the two Shanghai-based firms would create the largest brokerage in the country, though the move raises expectations of other mergers across an industry that has come under tighter government control throughout Xi Jinping’s third term. Some smaller local brokerage firms also revealed merger and acquisition plans in recent weeks.

Deal activity has slumped across China’s once-booming securities sector since the Covid-19 pandemic, amid a broad decline in business sentiment and a loss of economic confidence. As of May, there were fewer initial public offerings in China than in any year since 2009, Dealogic data shows, while cross-border financial activity has also slumped. The CSI 300 index of Shanghai- and Shenzhen-listed stocks is down 14 per cent in the past year.

China’s brokerage industry includes state-owned behemoths such as Citic and CICC, where top executives have had their pay cut as Beijing seeks to emphasise high-end manufacturing amid a prolonged property market slowdown. 

In December last year, China’s Central Financial Commission said it had “learned the lessons of Western financial development” in a top party journal, seeking to contrast its approach to the west and raising expectations of reform. 

President Xi Jinping also urged regulators at the meeting to cultivate “first rate” investment banks and investment institutions, to help “build China into a strong financial powerhouse”.

Analysts at Morgan Stanley said the merger “could send a positive signal to the market” that “effective supply-side reform within the brokerage market could be about to take place”.

They pointed to “challenging capital market cycles and a tightened regulatory landscape, which sent multiple revenue lines for brokers into a sharp decline in 2023 and the first half of 2024”. Shares of local brokerages surged on Friday morning. 

The merger announcement came days after the arrest of Jiang Chengjun, former deputy general manager and one of the investment banking department heads at Haitong Securities, over alleged offences related to his job. Jiang was extradited to China weeks after he had fled abroad, according to state broadcaster CCTV. Jiang could not be reached for comment.

Haitong International Securities, its investment banking arm in Hong Kong, was under close watch from investors as well as regulators after offshore property developer defaults led to losses of nearly HK$13bn (US$1.7bn) in 2022 and 2023 combined — the biggest recorded by a Chinese mainland brokerage in Hong Kong. The business was delisted in Hong Kong in January.

Foreign banks, which invested heavily in expanding their China operations over the past decade, have also had to contend with a worsening market and a sharp decline in cross-border activity. Parts of JPMorgan’s investment banking business had “fallen off a cliff”, chief executive Jamie Dimon said at a conference in Shanghai in May.