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Big brokerage IPO requires faith in Chinese reform
March 22, 2017 / 5:47 AM / 6 months ago

Big brokerage IPO requires faith in Chinese reform

An investor reacts in front of an electronic board showing stock information at a brokerage house in Shanghai, China, March 7, 2016. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - An upcoming initial public offering by Guotai Junan Securities is an investment in market reform. China’s second-biggest brokerage is expected to raise $2 billion in Hong Kong, joining a listing frenzy by mainland securities companies in the territory. The crowded Chinese securities sector faces multiple threats: margins are thin and regulators are fickle. But Guotai Junan’s scale and breadth position it well to benefit from more liberalisation and better enforcement.

Shanghai-listed Guotai Junan is preparing a chunky offering with Shenzhen Energy Group as a cornerstone investor. It kicks off pre-marketing this week, IFR reports. Some recent trends are discouraging. Shares in recently listed peers Orient and Everbright, for example, trade below their IPO price and underperform the benchmark Hang Seng Index. On the other hand, heavyweights like Haitong Securities, which listed in 2012, have outperformed the market.

Size matters in an industry where competition is crushing margins even as revenue grow 26 percent annually. Guotai Junan’s stock trading fees have plummeted more than a third in two years. But the company can still charge 16 percent more than average, its draft prospectus said. It is also diversifying into investment banking services.

China’s regulatory landscape is still challenging. Measures introduced to restrain excessive margin financing in mid-2015 sent domestic stock markets into a tailspin. Seeking to deter short-selling, regulators sterilised derivatives and futures markets, and pulled in fund managers for interrogations in a purge-like atmosphere. Volumes tanked as frightened investors stepped to the sidelines.

But regulators started relaxing restrictions on derivatives in February. They are also moving to boost cross-border investment. In December a second stock-trading link opened between Hong Kong and Shenzhen, adding to the current Shanghai connection. A similar “bond connect” is set to be rolled out by the end of the year; a channel for exchange-traded funds could follow.

Even better for Guotai Junan, Beijing is making the industry easier to regulate by squeezing bit players out. In October, for example, regulators reduced the maximum number of securities accounts per investor to three, down from 20, a decision targeting speculators that could hurt smaller brokers. For anyone putting faith in Beijing’s commitment to market reform, an offering from Guotai Junan could be a good play. 

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