China’s brokerage giants merge: Guotai Junan and Haitong lead $1.7 trillion industry shake-up

The deal combining two state-backed brokerages to make a sector leader in China with $230 billion in assets is part of Beijing's drive to consolidate the $1.7 trillion industry amid challenging markets. The analysts said this is going to pick up more pace.

Shanghai-based Guotai Junan Securities will acquire cross-town rival Haitong Securities in a share swap, the two firms said late on Thursday, pending regulatory and shareholder approval.

The combined entity, with 1.6 trillion yuan ($226 billion) in total assets, will dethrone Citic Securities to become China's largest brokerage. Trading in shares of Guotai Junan and Haitong was frozen on Friday.

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In addition, both Haitong and Guotai Junan are controlled by companies running state assets for the Shanghai government.

Under the deal, Guotai Junan plans to issue new shares to investors in Haitong's mainland China and Hong Kong listed shares, according to exchange filings. Also, it will issue new shares in the onshore market to raise funds for the deal.

Huatai Securities said in a research note that the consolidation of China's brokerage industry is expected to accelerate, and it will be about firms with state shareholders taking centre stage.

Beijing has turned up the rhetoric about the need for reform in the brokerage sector with new directives to encourage mergers and acquisitions and restructuring in the industry where over 140 Chinese and foreign players compete.

The securities regulator of China announced in March it would work to cultivate about ten leading institutions in the next five years, or two to three internationally competitive investment banks and institutions, by 2035.

Since the end of last year, there have been notices regarding the M&A between six pairs of smaller brokerages, such as, according to the official Shanghai Securities News, the merger between Ping An Securities and Founder Securities.

The latest announcement comes three months after Shanghai Communist Party Secretary Chen Jining called on Guotai Junan during a visit to the brokerage "to march toward becoming a globally competitive and influential investment bank."

The deal would also fuel market expectations of more mergers and acquisitions, potentially including deals involving CICC and Galaxy Securities, said Xu Kang, an analyst at Hua Chuang Securities.

Other possible mergers include those between Citic Securities and China Securities, Xu said.

Spokespersons for CICC, Galaxy Securities, Citic Securities, and China Securities did not immediately respond to Reuters requests for comment.