A Chinese trader works at Shanghai Stock Exchange. Securities firms in China with market value of at least $1bn have dropped about 15% on average this year, after more than doubling in 2014.
Bloomberg/Hong Kong
The world-beating surge in Chinese brokerages is reversing as short sellers increase bets against the stocks and investors speculate regulatory changes will erode earnings.
Securities firms in China with market value of at least $1bn have dropped about 15% on average this year, after more than doubling in 2014. Short interest, or wagers on a decline, in China Galaxy Securities Co and Shanghai-based Haitong Securities Co have climbed to at least 12% of outstanding shares, the highest among global peers tracked by Bloomberg and Markit Group.
Brokerage valuations in the world’s second-largest stock market reached the most expensive levels in at least three years at the end of 2014 as Chinese equity volumes climbed to all-time highs and fees from margin lending surged. The industry’s profit outlook is now darkening after turnover shrank by about 33% from its peak, authorities took steps to cool the growth of margin trading and China said it may allow banks to enter the brokerage business.
For Chinese securities firms, “the investment logic was broken,” said Chris Tang, the chief investment officer at Marco Polo Pure Asset Management, whose Pure China fund was the top performer in the second half of 2014 among China-focused hedge funds tracked by AsiaHedge Intelligence. Marco Polo sold its holdings of brokerages in January, Tang said.
Shares of the biggest Chinese brokerages lost an average 15.1% this year through Monday, excluding Guosen Securities Co, which surged 95% after completing an initial public offering at the end of December. The retreat compares with a 2.1% gain in the Shanghai Composite Index and a 1.1% average drop for global peers.
The losses in brokerage shares has accelerated since Jan. 16, when the China Securities Regulatory Commission suspended Citic Securities Co, Haitong Securities and closely held Guotai Junan Securities Co from loaning money to new equity-trading clients and told securities firms to stop lending to traders with less than 500,000 yuan ($79,800).
Citic dropped 2.4% on Tuesday in Hong Kong, while China Galaxy declined 4% and Haitong slipped 1.7%.
Short interest in the Hong Kong-listed shares of China Galaxy Securities has climbed to a record 13.3% of outstanding stock from 2.1% at the start of the year. Bets against Haitong amount to 12%, while Citic Securities, the nation’s biggest brokerage by market value, has a ratio of 7.2%. In the US, Goldman Sachs Group and Morgan Stanley both have ratios of about 0.2%, according to Markit.
All three of the Chinese brokerages have price-to-book ratios at least 28% higher than their historical averages, data compiled by Bloomberg show. Citic trades at 2.6 times net assets, up from 1.5 a year ago. That compares with a ratio of 2.1 for the Shanghai Composite.
Jin Xiaobin, board secretary of Haitong Securities, didn’t immediately respond to an e-mail seeking comment. A press officer at Citic Securities also didn’t reply to an e-mail seeking comment. A Beijing-based media-relationship official at China Galaxy Securities declined to comment.
Government curbs have so far done little to slow the growth in stock purchases using borrowed funds, with the outstanding balance of margin trading on the Shanghai exchange rising to a record 824bn yuan on March 6, according to bourse data compiled by Bloomberg.
Chinese brokerages earned about 44.6bn yuan in interest income from margin finance and securities lending in 2014, according to the Securities Association of China. Citic Securities said its net income surged 115% last year, while profit at Haitong jumped 89%.
Manulife Asset Management has been reducing holdings of Chinese brokerages amid concern their plans to raise new capital will dilute existing shareholders, according to Kai Kong Chay, a Hong Kong-based money manager at the firm, which oversees $277bn globally.
Citic Securities said in January it will push ahead with a plan to sell about $4.6bn of shares to develop capital- intensive operations including margin financing and securities lending. Haitong also said that month its plan to raise about $3.9bn remains intact.
The latest headwind for the industry emerged on Friday after the CSRC said it’s studying a proposal to open up the brokerage industry to financial institutions such as banks. There’s no timetable on when the new policy will be announced, the regulator said.
