Shanghai-based Guotai Junan Securities 601211.SS is set to acquire rival Haitong Securities 600837.SS through a share swap, the two companies announced late Thursday. The deal is subject to regulatory and shareholder approval.
The merged entity, with 1.6 trillion yuan ($226 billion) in total assets, will overtake Citic Securities 600030.SS as China’s largest brokerage. Trading in Guotai Junan and Haitong shares was suspended on Friday.
Both Haitong and Guotai Junan are controlled by companies that manage state assets for the Shanghai government.
According to the filing, Guotai Junan plans to issue new shares to investors in Haitong’s mainland and Hong Kong-listed entities. Guotai Junan will also issue new shares in the onshore market to raise funds for the deal.
“This marks the start of an industry-wide consolidation that will see more mergers between major brokerages,” said Huang Yan, fund manager at Shanghai QiuYang Capital Co, referring to the Guotai Junan-Haitong deal.
The consolidation will focus on companies backed by state-owned shareholders, Huatai Securities said in a research note.
Beijing has stepped up rhetoric on the need to reform the brokerage sector, with new directives to encourage mergers and acquisitions and restructuring in an industry where more than 140 Chinese and foreign players compete.
China’s securities regulator said in March it aimed to develop around 10 leading institutions in about five years, with two or three internationally competitive banks and investment institutions by 2035.
Beijing’s ambition to create large, competitive investment banks comes a few years after a string of global banks, including Goldman Sachs GS.N and Morgan Stanley MS.N, took full control of Chinese firms with an eye on greater market share.
Since the end of 2023, there have been announcements of mergers between six smaller brokerage peers, including, according to the official Shanghai Securities News, the merger of Ping An Securities 601318.SS and Founder Securities 601901.SS.
Risk prevention
The deal would fuel market expectations of more mergers, including possible deals between CICC 601995.SS and Galaxy Securities 601881.SS, according to Xu Kang, an analyst at Hua Chuang Securities.
Other possible mergers include a combination of Citic Securities and China Securities 601066.SS, Xu said.
Spokespeople for CICC, Galaxy Securities, Citic Securities and China Securities did not immediately respond to Reuters’ requests for comment.
Shares of Chinese brokerages rose on Friday following news of the merger. An index tracking China-listed brokerages .CSI399975 gained as much as 2.6%, while the CSSW Securities index .CSI399707 rose as much as 2.2%.
Shanghai-listed CICC shares rose as much as 8%, while Galaxy Securities rose as much as 10% to hit a two-month high. By comparison, the blue-chip CSI300 index .CSI300 fell 0.5% to hit a seven-month low in afternoon trading.
Market volatility and a decline in initial public offerings and other capital market transactions in a slowing economy have been weighing on sector earnings, with the performance of smaller brokerages in particular taking a hit.
Haitong, for example, suffered quarters of falling profits, loss-making international business and scandals that included a top investment banker at the company fleeing abroad before being arrested for an alleged work-related crime.
Revenue at China’s 43 listed brokerages fell 16 percent in the first half, with net profits dropping by more than a fifth over the same period compared with a year ago, according to a research note from Guolian Securities.
In April, the State Council issued a guideline highlighting the need to strengthen regulation, prevent risks and promote capital market development. It also encouraged major securities and futures companies to improve competitiveness through mergers and acquisitions, restructuring and other means.
The latest merger could send a positive signal to the market that “supply-side reform” in the sector was about to take place due to challenging market cycles and a stricter regulatory landscape, Morgan Stanley said in a research note.
“In the near term, we believe the announced deal could rekindle some investors’ interest in brokerage stocks in general, especially those with potential M&A activity,” Morgan Stanley analysts wrote.
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