China will open its capital markets to Hong Kong and Macau brokerages, allowing qualified firms to form joint ventures with mainland peers but limiting them to one fully licensed stock brokerage in a few designated municipalities and regions.
The China Securities Regulatory Commission (CSRC) said qualified financial institutions from Hong Kong and Macau will be allowed to establish one fully licensed securities house in Shanghai, Shenzhen and throughout Guangdong province, according to an announcement posted on the regulator's website.
The move follows a supplemental agreement signed in 2013, one of the several follow-on deals to the Mainland China-Hong Kong Closer Economic Partnership Arrangement (CEPA), a comprehensive trade and economic pact signed in 2003.
Any fully licensed Hong Kong and Macau JV broker may participate in the range of financial services on the onshore capital market, including stock broking, IPO underwriting and wealth management.
The Hong Kong and Macau brokerages will be able to own up a 51% stake of the JVs, a move that grants them controlling interest and a bigger say in the way the firms are run.
In comparison, global financial institutions' equity holding in mainland JVs are capped at 49%, a ceiling that prevents them from exercising control.
Meanwhile, in China's pilot reform zones, such as in the wealthy coastal city of Wenzhou in Zhejiang province, qualified financial institutions from Hong Kong and Macau are also allowed to set up fully licensed brokerages and hold up to a 49% stake.
Hong Kong and Macau JV brokerages are no longer subject to regulations requiring one Chinese mainland shareholder of the JV to be a domestic broker or that a single Chinese shareholder must hold a 49% stake.
While some market observers say the move showcased the Chinese regulator’s willingness to open the domestic securities industry and offer a broader choice of investments to domestic clients, they agree the impact will likely be limited.
Caixin, an well-regarded mainland media outlet, reported that a senior executive at a large Chinese securities house said Hong Kong and Macau investors generally don’t have strong interest in setting up and controlling JV brokerages across the border.
“The advantage brought by [Chinese] brokers’ license has lost the glory due to China’s [booming] Internet finance," the executive said in the report. "Newly set-up brokers won’t necessarily make profits”.
As of March, about 55 domestic securities firms had won online brokerage licenses from the regulator, as the interest in China’s internet finance has grown fast in the past few years.
A Hong Kong-based portfolio manager at another large Chinese securities house however told FinanceAsia that Hong Kong and Macau brokers might still want to “have a slice” of China’s enormous markets in spite of on-going market volatility.
“China's market is still there and is huge," said the portfolio manager. "They might have the will but they lack the strength as they are generally much smaller than their foreign and Chinese peers”.
“And don’t forget the [stock ] market is so bad now. No need for them to rush anyway,” she added.