Chinese brokerages are in a race to raise billions of dollars in capital to meet regulatory requirements, jumping on a market upturn to bolster operations as they brace for tougher competition from Wall Street banks on their home turf.
Chinese equities have rebounded more than 10% on economic recovery bets since Beijing dismantled zero-COVID curbs last month, opening a window of opportunity for share issues by the brokerages. Morgan Stanley expects another 13% jump from the current level by end-2023.
The index tracking shares of brokers in China touched a six-month high this week, while the same in Hong Kong has jumped roughly 50% from October lows.
At least six listed brokerages - including China International Capital Corp (CICC) and Huatai Securities - are seeking to sell new shares in private placements or rights issues to raise up to 82.5 billion yuan ($12.2 billion), according to calculation based on their exchange filings.
The brokerages need fresh capital to meet Chinese risk management rules, and finance capital-intensive businesses such as margin financing and market-making, having weathered volatile markets in the last couple of years. The sector saw a 19% profit slump during the first nine months of 2022, according to the industry association.
Other peers could join the pipeline later in the year, say analysts. Chinese brokerages raised just 77 billion yuan via follow-up share sales last year, Refinitiv data showed.
"The market revival is good news for brokerages as they can choose to sell additional shares at a better price," said Xia Chun, chief economist at Shanghai-based wealth manager Yintech Investment Holdings.
"Securities firms need capital to transform their business model by reducing reliance on traditional businesses."
The brokerages traditionally make money mainly from trading commissions, underwriting fees and propriety trading. Many are now expanding into more stable businesses such as wealth and asset management.
It may not be plain sailing for all seeking fresh capital.
"For big share placements, existing shareholders need adequate cash to participate. Some would choose to sell" rather than buy, said Liam Zhou, founder of Minority Asset Management Co.
The key driver in the rush to raise capital is regulatory change: China's securities watchdog tightened risk-management rules in 2020, requiring that a brokerage's core net capital must not be lower than 8% of total assets.
In addition, quality liquid assets must exceed net cash outflows for the next 30 days, while a brokerage should also have adequate, stable capital base, the regulator has said.
CICC, Huatai, and several other listed brokerages are near the regulatory borderline on one or several metrics, Haitong Securities said in a research note this month, adding they need fresh capital to expand.
Another challenge is looming: Western competition.
Chinese brokerages face stiffer competition after Beijing allowed Western banks, including Morgan Stanley, Goldman Sachs and Credit Suisse, to take full control of their China brokerage units.
Rights issues - in which a company invites all shareholders to subscribe to new shares - are being adopted by big brokerages as the preferred channel to raise capital, said Gui Haomin, analyst at brokerage Shenwan Hongyuan.
"The challenge (for Chinese brokerages) is to sustain the good performance and that will depend on the government's policy towards capital markets," said Alec Jin, investment director of Asian equities at Abrdn, which owns shares in CICC.
"If we see clear signals from the government, backed by policy action, of its intent to liberalise the capital markets, the sector's current valuation is very attractive compared to its long-term potential."