China may merge its two biggest brokerage firms to create a company that would go against global investment banks in Wall Street. The strategy includes the opening of its financial markets and a feasibility study on how to structure the deal.
Citic Securities Co. and CSC Financial Co. and its government shareholders Citic Group and Central Huijin have started a feasibility study to structure a deal that merges two of China's biggest brokerage firms to go against Wall Street players. The developments of the deal remain private.
The report claimed that insiders revealed regulators such as the China Securities Regulatory Commission and the state-owned Asset Supervision and Administration Commission have been briefed regarding the process.
The merger between Beijing-based Citic and CSC was said to create an investment bank with a value of 67 billion USD surpassing the value of US's Goldman Sachs Group Inc. in market capitalization. Once China opens the 45 trillion USD company, the merger was believed to go head-to-head against Wall Street giants.
According to an analyst with Guosen Securities Co. Wang Jian, China's securities industry is currently scattered and big local players remain behind their global peers in the worldwide market. He added that internal growth is time-consuming, but once China would improve its industry's competitiveness through mergers, the influx of foreign capital would also improve.
The report then claimed that there is still no guarantee that the merger discussions would result in a deal. Chinese authorities were said to consider the plan once it enters commercial grounds. At present, Citic's shares improved by 5.7 percent while CSC's stock also improved by 11 percent in Hong Kong trading.
Last year, China Securities Regulatory Commission announced its willingness to create investment banks of an "aircraft carrier size" that would be used as a competitor against Wall Street and promote an international expansion of its brokerage industry.
At present, China's 131 brokers own assets equal to what Goldman Sachs has. They were also reported to be far from operating as full-service investment banks and currently rely on mom and pop traders across the country to increase their revenue yields. The Chinese market was also considered fragmented were the top five Chinese brokers only captured about a third of the industry's revenue.
The combination of Citic and CSC would generate about one trillion yuan of assets and house 25,000 employees. Both entities rank as the top two companies in terms of underwriting deals and folding CSC might add to Citic's dominance in the brokerage industry.
