Caixin
Aug 14, 2024 08:30 PM
FINANCE

In Depth: China Amps Up Scrutiny of Freewheeling Securities Firms

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Many of China’s securities firms have been stung for lax compliance recently, while new rules aim to restrict the sector’s capital-intensive businesses.
Many of China’s securities firms have been stung for lax compliance recently, while new rules aim to restrict the sector’s capital-intensive businesses.

China’s securities firms are witnessing a stricter regulatory environment as the country’s top securities watchdog has increased scrutiny of their capital-intensive activities and internal workings.

The China Securities Regulatory Commission (CSRC) in May revised rules to strengthen the supervision of listed securities firms, stipulating that they should focus on their core businesses while capital-intensive activities should be conducted with caution.

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  • The China Securities Regulatory Commission (CSRC) has intensified its scrutiny on securities firms, emphasizing cautious conduct in capital-intensive activities and strengthening internal compliance.
  • Since Wu Qing became CSRC chairman in February, over 100 penalties have been issued to more than 30 securities firms, signaling a stricter regulatory environment.
  • Securities firms may need to transform their business strategies, possibly through mergers and acquisitions, due to increasing regulatory scrutiny on capital-raising practices and risk management.
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China’s securities firms are encountering heightened regulatory scrutiny from the China Securities Regulatory Commission (CSRC), which has increased its focus on their capital-intensive activities and internal compliance [para. 1][para. 2]. In May, the CSRC revised rules to bolster supervision, advising that these firms concentrate on their core businesses and approach capital-intensive activities with caution [para. 2]. This has led to a surge in warnings and penalties for issues such as lax compliance and risk management. A notable example is the recent warning issued to SDIC Securities Co. Ltd.’s branch in Hebei [para. 3].

The new CSRC chairman, Wu Qing, has significantly ramped up inspections and special business checks since assuming office in February, resulting in over 100 penalties and regulatory measures to more than 30 securities firms and their employees by May [para. 5]. Major securities firms like Citic Securities Co. Ltd., Haitong Securities Co. Ltd., Huatai Securities Co. Ltd., and China International Capital Corp. Ltd. have seen various levels of staff penalized [para. 6].

A securities lawyer indicated that the current regulatory environment is the strictest in years, as previously minor infractions that might have resulted in warning letters are now subject to administrative penalties [para. 8]. Punishments have become more severe and timely compared to previous years [para. 8][para. 9].

Since October, the CSRC has intensified oversight following the top policymakers’ call for stricter supervision at the Central Financial Work Conference [para. 10]. The increase in penalties serves as a warning to other securities firms, pushing them to raise their internal compliance standards [para. 11].

Securities firms may need to slow down their expansion of capital-intensive businesses due to regulatory concerns and the revised supervision rules published in May, which urge prudence in such activities [para. 12][para. 14]. This is particularly significant as many brokers have profited by engaging in margin financing, securities lending, and stock pledge, among other activities [para. 14][para. 15].

The enthusiasm to raise capital from stock markets was notably high in 2020 after the CSRC relaxed refinancing rules. That year, 26 listed securities companies raised around 177 billion yuan ($25.7 billion) through refinancing, a substantial increase from the 5.9 billion yuan raised by only four listed companies the previous year [para. 17]. However, the practice of using these funds to scale up interest-spread-reliant businesses has cast doubts on the firms' professionalism in investment [para. 18].

Consequently, securities companies will no longer be able to depend solely on raising funds in the capital markets to grow [para. 18]. This situation highlights the need for these firms to transform their business models to drive revenue growth sustainably [para. 19]. Mergers and acquisitions (M&A) among leading brokers are key to watch as the industry transitions, in line with policymakers' efforts to build first-class investment banks [para. 20].

Liu Min, an analyst at Chasing Securities Co. Ltd., suggested that the industry might undergo a reshuffle due to continued M&A activities, with acquisitions among large industry players being a distinct possibility [para. 21].

For further information, contact reporter Qing Na at qingna@caixin.com and editor Jonathan Breen at jonathanbreen@caixin.com [para. 22].

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Who’s Who
SDIC Securities Co. Ltd.
SDIC Securities Co. Ltd. has faced increased regulatory scrutiny, including a recent warning against its branch in North China’s Hebei province for compliance and risk management missteps. This scrutiny is part of broader regulatory tightening under CSRC Chairman Wu Qing, who has intensified inspections. SDIC is among over 30 securities firms penalized since Wu’s appointment in February, with regulators aiming to enforce stricter internal compliance and caution in capital-intensive activities.
Citic Securities Co. Ltd.
Citic Securities Co. Ltd. (600030.SH) is a leading securities firm in China that has faced increased regulatory scrutiny under the new CSRC chairman, Wu Qing. Both executives and lower-level staff have been penalized for various business missteps. The firm, like others, is now urged to focus on core businesses while exercising caution in capital-intensive activities.
Haitong Securities Co. Ltd.
Haitong Securities Co. Ltd. (600837.SH) is one of the major securities firms mentioned in the article that has faced regulatory penalties. Both executives and lower-level staff from the company have been penalized for various business missteps. The increased scrutiny under CSRC Chairman Wu Qing has led to stricter enforcement and a rise in penalties within the securities sector.
Huatai Securities Co. Ltd.
Huatai Securities Co. Ltd. (601688.SH) is one of the leading securities firms in China facing increased regulatory scrutiny. Under the leadership of the new CSRC chairman, Wu Qing, the firm has seen penalties and warnings for compliance and risk oversight lapses. The recent regulatory environment demands firms like Huatai to adopt stricter internal compliance and cautious engagement in capital-intensive activities.
China International Capital Corp. Ltd.
China International Capital Corp. Ltd. (601995.SH) is a leading securities firm in China. It has faced penalties alongside other major firms under increased scrutiny by the China Securities Regulatory Commission (CSRC). Both executives and lower-level staff at the firm have been penalized for various business missteps. As part of broader regulatory measures, it is encouraged to exercise caution in capital-intensive activities and strengthen internal compliance.
Guoyuan Securities Co. Ltd.
Guoyuan Securities Co. Ltd. is cited in the article for a report it published. It noted that in 2020, a total of around 177 billion yuan ($25.7 billion) was raised by 26 listed securities companies through refinancing. This was significantly higher than the 5.9 billion yuan raised through refinancing in the previous year.
Chasing Securities Co. Ltd.
Chasing Securities Co. Ltd. is mentioned in the article through Liu Min, an analyst at the firm. Liu Min highlighted that mergers and acquisitions among leading securities brokers are significant for investors and align with policymakers' efforts to develop first-class investment banks.
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What Happened When
October 2023:
The Central Financial Work Conference calls for stricter supervision of the securities sector.
Since late October 2023:
The China Securities Regulatory Commission (CSRC) has intensified oversight in response to top policymakers' call for stricter supervision.
February 2024:
Wu Qing becomes chairman of the CSRC and increases the frequency of inspections and special business checks on securities firms.
May 2024:
The CSRC revised rules to strengthen the supervision of listed securities firms, stipulating that they should focus on their core businesses while conducting capital-intensive activities with caution.
As of May 2024:
The CSRC and the Shanghai and Shenzhen stock exchanges had issued more than 100 penalties and regulatory measures to over 30 securities firms and their employees since Wu became chairman.
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