bonsai
01-11-2004, 09:33 PM
Chinese Might Feel Insecurity Over Securities
The government's decision to seize control of an insolvent brokerage exposes weaknesses in the industry.
By Richard McGregor, Financial Times, 1.11.04
SHANGHAI — In late December, a few weeks before the government stepped in to take over China Southern Securities, the outgoing chairman remarked in an unusually frank interview that his company was no worse than most of China's 100-odd other brokerages.
"If Southern Securities is to go bankrupt, then there are only a few good brokerages in the industry" that could avoid the same fate, Kan Zhidong said.
He later resigned in despair at his failure to turn around the company, China's fifth-largest brokerage.
The government's decision to seize control of Southern Securities, which is based in Shenzhen, the southern boomtown bordering Hong Kong, is the culmination of a 30-month-long struggle to recapitalize a company drained of resources by shoddy and often illegal management practices in the last five years.
Although no official announcement has been made, the Hong Kong media reported that Southern Securities had losses of $1.45 billion and was technically insolvent.
Less clear, however, is whether the takeover of Southern Securities marks the beginning of a serious drive by regulators to address the deep-seated problems in the securities industry.
Few in the industry doubt Kan's claim that many brokerages are as deeply in the red as Southern. But untangling their affairs and galvanizing their owners, mostly city governments, into action will not be easy.
The securities industry has never recovered from the market's descent into a prolonged bearish mood in mid-2001, a point also marked by a crackdown by the China Securities Regulatory Commission on stock manipulation.
The securities companies had been major players in ramping up stocks, often using money taken from their clients' accounts. But the bear market and the CSRC's vigilance curtailed much of the most blatant manipulation.
Brokerages were hit hard also by a collapse in commission income as trading volumes shrank.
Volumes have begun rising again in the last six months, but the partial deregulation of commissions has meant that this increase in trading has not translated into extra income.
As a result, the securities industry lost $411 million in the year ended September 2003, compared with a loss of $447 million for all of 2002, according to figures released in November. Three out of four brokerages were in the red.
The CSRC has tentatively been trying to clean up the industry, closing down or suspending a series of money-losing brokerages in the last 12 months. The securities companies affected include Anshan, Dalian, Jiamusi, Xinhua and Fuyou Securities.
Like Japanese securities houses in the bubble years, the Chinese brokerages had been caught short by offering services, such as high-yield bonds to attract money for proprietary trading and guaranteed returns on share trading, that could not be sustained in a market downturn.
In an attempt to generate business, Southern Securities pursued the same shady practices, luring investors with a guaranteed 15% return, as well as using clients' funds to buy real estate, which is illegal under securities laws.
Kan, a veteran investment banker and a controversial figure in the industry, was invited by the Shenzhen government to take over Southern Securities in 2002 and restore it to health.
By the time he took charge, Southern Securities' net asset value had shrunk to $120.8 million from $338.2 million in 2000, according to the China Assn. of Securities.
Southern Securities had taken on new shareholders in 2000, but Kan said they had never accepted that the industry's downturn required changes to the way the company did business.
The new shareholders "complained that Southern had not revealed enough of the financial risks [it was facing] in its accounts, and decided to go deeper into the books, exposing some past problems," the outgoing chairman said. "That led to a reduction in deposits and clients and made financing more difficult. That was the start of Southern's problems."
Southern's lengthy and well-documented decline meant that its takeover last week by the Shenzhen government, the CSRC and other agencies had no immediate impact on the local stock market. Authorities also pledged to keep the brokerage open, further helping to quell any investor panic.
The government's decision to seize control of an insolvent brokerage exposes weaknesses in the industry.
By Richard McGregor, Financial Times, 1.11.04
SHANGHAI — In late December, a few weeks before the government stepped in to take over China Southern Securities, the outgoing chairman remarked in an unusually frank interview that his company was no worse than most of China's 100-odd other brokerages.
"If Southern Securities is to go bankrupt, then there are only a few good brokerages in the industry" that could avoid the same fate, Kan Zhidong said.
He later resigned in despair at his failure to turn around the company, China's fifth-largest brokerage.
The government's decision to seize control of Southern Securities, which is based in Shenzhen, the southern boomtown bordering Hong Kong, is the culmination of a 30-month-long struggle to recapitalize a company drained of resources by shoddy and often illegal management practices in the last five years.
Although no official announcement has been made, the Hong Kong media reported that Southern Securities had losses of $1.45 billion and was technically insolvent.
Less clear, however, is whether the takeover of Southern Securities marks the beginning of a serious drive by regulators to address the deep-seated problems in the securities industry.
Few in the industry doubt Kan's claim that many brokerages are as deeply in the red as Southern. But untangling their affairs and galvanizing their owners, mostly city governments, into action will not be easy.
The securities industry has never recovered from the market's descent into a prolonged bearish mood in mid-2001, a point also marked by a crackdown by the China Securities Regulatory Commission on stock manipulation.
The securities companies had been major players in ramping up stocks, often using money taken from their clients' accounts. But the bear market and the CSRC's vigilance curtailed much of the most blatant manipulation.
Brokerages were hit hard also by a collapse in commission income as trading volumes shrank.
Volumes have begun rising again in the last six months, but the partial deregulation of commissions has meant that this increase in trading has not translated into extra income.
As a result, the securities industry lost $411 million in the year ended September 2003, compared with a loss of $447 million for all of 2002, according to figures released in November. Three out of four brokerages were in the red.
The CSRC has tentatively been trying to clean up the industry, closing down or suspending a series of money-losing brokerages in the last 12 months. The securities companies affected include Anshan, Dalian, Jiamusi, Xinhua and Fuyou Securities.
Like Japanese securities houses in the bubble years, the Chinese brokerages had been caught short by offering services, such as high-yield bonds to attract money for proprietary trading and guaranteed returns on share trading, that could not be sustained in a market downturn.
In an attempt to generate business, Southern Securities pursued the same shady practices, luring investors with a guaranteed 15% return, as well as using clients' funds to buy real estate, which is illegal under securities laws.
Kan, a veteran investment banker and a controversial figure in the industry, was invited by the Shenzhen government to take over Southern Securities in 2002 and restore it to health.
By the time he took charge, Southern Securities' net asset value had shrunk to $120.8 million from $338.2 million in 2000, according to the China Assn. of Securities.
Southern Securities had taken on new shareholders in 2000, but Kan said they had never accepted that the industry's downturn required changes to the way the company did business.
The new shareholders "complained that Southern had not revealed enough of the financial risks [it was facing] in its accounts, and decided to go deeper into the books, exposing some past problems," the outgoing chairman said. "That led to a reduction in deposits and clients and made financing more difficult. That was the start of Southern's problems."
Southern's lengthy and well-documented decline meant that its takeover last week by the Shenzhen government, the CSRC and other agencies had no immediate impact on the local stock market. Authorities also pledged to keep the brokerage open, further helping to quell any investor panic.