Goldman beware: China plans ‘aircraft carrier-sized’ rival

Bloomberg

China last week commissioned its first home built aircraft carrier to project its military might. It’s now on a mission to create “aircraft carrier-sized” investment banks to take on Wall Street’s giants.
As the nation prepares to fully open its $45 trillion financial industry to foreign competition next year, policy makers and regulators are pushing to beef up its own players to go toe-to-toe with the likes of Goldman Sachs Group Inc.
Unlike its massive commercial banks such as Industrial & Commercial Bank of China Ltd which dominate at home and carry heft globally, China’s brokers are minnows in an international perspective. Beijing’s latest ambition is seen sparking a wave of necessary mergers among its over 130 securities firms, led by Citic Securities Co.
“Compared with either domestic banks, insurers, or their global peers, Chinese brokers are too small to play a meaningful role in the financial market,” said Jiang Zhongyu, a Shanghai-based analyst at Essence Securities. “The country’s capital market development calls for a heavyweight broker.”
Taken together, China’s 131 brokers have assets that are equal to what Goldman Sachs sits on by itself. They are also far from being full-service investment banks, counting on mom and pop traders across the country to contribute much of their revenue.
Past efforts to expand out from China have born little fruit. Citic’s highly touted attempt to build an international presence by buying Hong Kong brokerage CLSA Ltd in 2012 faltered amid a wave of infighting and defections.
China’s fifth-largest, Haitong Securities Co, gets a significant part of its revenue from Hong Kong, but has struggled with a unit in Europe. China International Capital Corp, though, is among the top 10 in global initial public offerings this year.
The financial opening, which culminates in December next year when foreign securities firms are allowed to take 100% ownership of units in the country, is adding to the urgency of building a meaningful local player.
UBS Group AG , JPMorgan Chase & Co, Nomura Holdings Inc have already gained majority control of local joint ventures, while Goldman Sachs, Morgan Stanley and others have applied to follow suit in a bid to capture an estimated $9 billion in annual profits for brokers and banks. Size will matter more and more as Beijing urges brokerages to take a bigger role in supporting the economy. Less than one-quarter of China’s $2.9 trillion of financing last year was from bond and equity issuance, with the rest from bank loans, according to central bank data compiled by Bloomberg.
In a statement last month, China Securities Regulatory Commission said it wanted to create investment banks with “aircraft carrier size” and would support mergers within the industry, enhance capital strength, expand the services they offer and promote “internationalisation.”
Chinese brokerages have largely been involved in less capital demanding business such as trading and underwriting after three decades of development. They will need capital to build out a broader array of investment banking services, market making and margin lending. Meanwhile, many small- and medium-sized firms are struggling as an exodus of retail investors halved income in 2018.