HONG KONG  - A $70 billion Chinese investment megabank would be big, but not necessarily threatening. Beijing is mulling combining state-backed Citic Securities and CSC Financial, producing a domestic giant that could fend off encroaching foreign rivals like Goldman Sachs, plus help rationalise a fragmented local industry. But rivals need not panic yet.

Consolidation in China’s overcrowded securities market is long overdue. Over 100 brokers fight for fees, primarily from mom-and-pop investors, who account for roughly three-quarters of equities trading. A potential tie-up between Citic Securities and rival CSC Financial, reported by Bloomberg on Tuesday, will combine the country’s two biggest firms, which together dominate local league tables. Integrating them could reduce pointless competition between government-controlled companies and yield economies of scale, by streamlining sales coverage and technology spending, plus reducing duplicate efforts in research and compliance. The resulting monster, with over $180 billion in assets under management, would instantly become the top onshore bank for equity and debt capital markets by a wide margin, Dealogic estimates, and challenge domestic competitors like CICC in mergers and acquisitions.

Fewer, bigger players could help China’s financial services industry confront another threat: seasoned foreign banks increasing their footprints as the government opens up the market. The likes of Morgan Stanley have little interest in chasing retail revenue, but China’s burgeoning institutional investor market is a tempting target. When it comes to serving such clients, foreign banks are already making significant inroads. UBS’s research department, for example, already covers 259 local stocks. As mainland fund managers become more sophisticated, brokerages will find themselves competing with Wall Street more and more.

Citic Securities and CSC deny knowledge of the talks. And whether Beijing wants consolidation or not, executives at both institutions may resist a push to combine. Chinese state enterprises are particularly prone to toxic office politics, partly because the presence of state backing insulates them from the financial consequence of operational inefficiencies and allows internecine struggles to drag on indefinitely. CSC managers have particular cause to be nervous about Citic Securities. The brokerage famously made a hash of its acquisition of CLSA, whose star talent has since left in droves due to clashes over culture and pay. A Chinese financial Goliath would be stronger, but not necessarily smarter.

 

CONTEXT NEWS

- China has begun the process of potentially merging its two largest brokerage firms to create a company that can better compete with the global investment banks, as the country opens up its financial markets to foreign firms, Bloomberg reported on April 14, citing people familiar with the matter.

- Citic Securities and CSC Financial, along with their government shareholders Citic Group and Central Huijin Investment, have recently started due diligence and a feasibility study on how to structure the deal, the report said.

- In separate statements to the Hong Kong stock exchange on April 14, Citic Securities said it is not aware of any related information regarding press speculation about the merger. CSC said it has not received any written or verbal information from any government department in respect to the news report.

 

(Editing by Pete Sweeney and Jamie Lo) ((alec.macfarlane@thomsonreuters.com; Reuters Messaging: alec.macfarlane.thomsonreuters.com@reuters.net))