A state-owned JPMorgan equivalent might help stave off foreign competition, but it won’t do much to fix the sector’s structural frailties
China may welcome its own diversified financial powerhouses soon. Size and breadth, however, probably won’t be enough to solve the structural contradictions that have long plagued Chinese capital markets.
Local media Caixin reported over the weekend that China might grant brokerage licenses to two banks as part of a pilot program that could create a full-service banking giant like JPMorgan Chase. In a Glass-Steagall fashion, Chinese commercial banking is separated from investment banking, with a few exceptions. China’s securities regulator said Sunday that there is nothing to disclose to the market at the moment but didn’t deny the report outright.
There have long been discussions about relaxing the segregation of investment and commercial banking, but the stock market crash in 2015 likely delayed any changes. With China opening its financial sector, creating a one-stop financial giant to compete against foreign players might be back on the agenda.
The potential entry of big state-owned banks into the brokerage industry is bad news for existing brokers, especially the smaller players. A large customer base and low funding costs give the banks an edge, particularly in retail brokerage. Many Chinese banks have investment banking subsidiaries in Hong Kong, which could help build their mainland businesses. Chinese brokerage stocks mostly fell Monday: Citic Securities and Haitong Securities both dropped more than 4%.
The impact on the banks could be more subtle. There may be new revenue streams for them, especially when they are required to perform national service to support the economy, as is often the case in downturns. The government has asked the banks to sacrifice as much as 1.5 trillion yuan ($212 billion) in profit this year to help small businesses through cheap loans, lower fees or repayment deferrals. There might not be much of an instant boost, though. The net profit of the whole brokerage industry in China is equivalent to only 6% of that of the banking sector, according to Nomura.
One goal for the government is to encourage the use of capital markets to finance businesses. Chinese companies have mostly relied on bank loans, instead of equities or bonds, as their main source of funding. Household wealth is also largely locked in property, instead of stocks or bonds. Big state-owned banks might be helpful in this aspect, given their large reach.
Creating a financial behemoth may be easy. But developing China’s capital markets requires deeper reforms to help the most productive firms access funding. A finance industry even more dominated by China’s notoriously hidebound big banks won’t necessarily help with that.
Individual investors will also need to be convinced that stocks and bonds are a better bet than real estate, which is widely perceived to enjoy an implicit state backstop because of property prices’ political sensitivity and deep links to the most vulnerable, indebted parts of the economy.
China is great at size—less so at efficiency and well-functioning markets. Even bigger state-owned players might not do much to rectify that.