Stockbrokers enlisted to prop up the Chinese markets

Securities houses are learning the hard way what it means to be a tool of the state. The largest brokerage houses in China were beneficiaries of the stock bubble.

Now the authorities have enlisted them to help prop up markets, sending their own shares tumbling.

Brokers like CITIC Securities, Haitong and Huatai have been the shock troops of Chinese market reform.

They benefited from an explosion in share trading — much of it financed with loans they provided. Valuations soared and the biggest brokers surpassed international investment banks like Credit Suisse and Deutsche Bank in market capitalisation.

They responded by selling equity to finance more margin lending. Chinese securities firms have raised $17.5bn (€15.8bn) in primary and secondary equity issuance in Hong Kong this year, according to Thomson Reuters data. They raked in a further $8bn from mainland markets.

As investors unwind margin loans, brokers have less interest income and lower transaction fees. Some loans may go bad. Reduced trading volumes would squeeze revenue and earnings. Regulators have also frozen initial public offerings.

Chinese authorities have strong-armed securities houses into trying to prop up markets.

On July 4, 21 securities firms announced that they would invest 15% of their net assets — and no less than 120bn yuan (€17.4bn) — in stocks. They committed not to sell as long as the Shanghai Composite index remained below 4,500 — 22% above where it had closed the previous day.