China Puts Foreign Securities Firms on Hold

By Maria Trombly | Securities Industry News | September 20, 2006

The China Securities Regulatory Commission (CSRC) has said that it will issue no new licenses to brokerages set up as joint ventures with foreign firms until the country's market reforms are completed. In a Sept. 13 statement, the agency gave no indication of when the ban will be lifted.

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New branches and subsidiaries of domestic securities firms are also on hold, except when the restructuring is part of a government-initiated risk reduction or reform initiative. According to the official China Securities News, the CSRC wants a cooling-off period to defuse risks.

"With the WTO [World Trade Organization] transition period coming to an end, the capital market will face a more competitive economic and financial environment," CSRC chairman Shang Fulin said in a speech, quoted in the newspaper, at the third International Financial Forum in Beijing. "Enhancing competitiveness and improving risk controls will be especially difficult." Fulin also reportedly said that the reforms won't be fully completed until October 2007.

"They're trying to sort things out internally first," said Fraser Howie, co-author of "Privatizing China" and a longtime observer of the country's securities industry. He said that the interruption won't have much practical effect because only a few joint ventures are in place.

Since Morgan Stanley set up an investment banking joint venture, CICC, with China Construction Bank in the mid-1990s, other foreign securities firms have been seeking permission to follow suit. But only Goldman Sachs Group, Japan's Daiwa Securities SMBC Co., France's BNP Paribas and the CLSA unit of Credit Agricole have succeeded.

Beijing's rationale for going so far as to halt new entrants is unclear, since less dramatic moves would have had the same result, according to Howie. "They can just postpone and delay," Howie said. "I don't understand why they came right out and said it."