China seeks to lift financial market status with merger of top brokerages

The proposed merger of Guotai Junan Securities Co. Ltd. and Haitong Securities Co. Ltd. to create a mega investment firm will help China carry forward its national strategy of elevating its financial market status.

As of Sept. 6, Guotai Junan had total assets of 898 billion yuan while Haitong's assets stood at 721 billion yuan, according to S&P Global Market Intelligence data. The merged entity will have 1.619 trillion yuan in assets, surpassing Citic Securities Co. Ltd., which currently leads with 1.495 trillion yuan in assets, the data shows.

As of 2023-end, Shanghai State-owned Assets Management Co. Ltd., a unit of the State-owned Assets Supervision and Admin Commission of the State Council, held a controlling stake of 21.35% in Guotai Junan, according to the broker's annual report. Meanwhile, 26.09% of Haitong's shareholdings are registered under HKSCC Nominees Ltd. on behalf of investors.

China aims to elevate the status of its financial market to the scale of its economy, which is the second-largest in the world in terms of gross domestic product after the US. At the Central Financial Working Conference, the country's top financial decision-making event, in October 2023, the seven-member Politburo Standing Committee called for "cultivating first-class investment banks and investment institutions" and "improving institutional positioning and support large state-owned financial institutions to become better and stronger."

In March, the China Securities Regulatory Commission said it aims to "form two to three investment banks and institutions with international competitiveness and market leadership by 2035."

China's stock market remained sluggish with the CSI 300 index, the key benchmark, losing 5.5% year to date to 3,200, which is near the multiyear low of 3,108 in February.

"With strong shareholder background, solid capital strength, prudent operating style and industry-leading comprehensive service capabilities, [Guotai Junan] has the potential to build a world-class investment bank," Chengdu-based Sinolink Securities said in an Aug. 21 note.

Guotai Junan's net profit declined by 18.6% to 9.37 billion yuan in 2023, while Haitong's profit plummeted by 84.6% to 1.01 billion yuan, Market Intelligence data shows. In the second quarter of 2024, Guotai Junan's return on average assets declined to 1.19% from 1.24% a year ago, while Haitong's fell to 0.1% from 0.68%.

The two brokerage firms on Sept. 5 signed a binding agreement to merge under which Guotai Junan will issue Shanghai Stock Exchange-listed A shares in exchange for Haitong A shares. A similar arrangement would apply to the Hong Kong-listed H shares, according to the releases of both firms. In addition, Guotai Junan will sell new A shares for ancillary fundraising, according to the release.

As of Sept. 6, US$1 was equivalent to 7.09 Chinese yuan.