[NEW YORK] China is speeding up the process of potentially merging its two biggest investment banks, in a move that would create an US$82 billion powerhouse and may spark a wave of consolidation among the country's more than 130 brokers.

In the latest proposal, Citic Group, the parent of China's largest broker Citic Securities Co (CSC), will act as the main buyer of a stake in CSC Financial, the nation's No 2, according to people familiar with the matter. Citic Group would buy the stake from state-controlled shareholder Central Huijin Investment, making it the largest shareholder and pave the way for a consolidation of resources and operations, said the people, who asked not to be identified as the matter is private.

While the details are still being finalised, the Communist Party committees of Citic Securities and CSC, which are key in deciding corporate strategy, have approved the blueprint, said the people. Citic Group is now lobbying the State Council for support before presenting the details to Central Huijin, they said.

The deal is playing out against a backdrop of seismic change in the country's US$1.2 trillion securities industry, with the potential for major domestic and foreign rivals entering the fray. Chinese regulators are discussing plans to allow the country's biggest lenders to enter the securities industry as China's market opening to Wall Street's giants raises urgency for local brokers to add heft to survive.

"Since 2018, China regulators have been exploring a variety of ways to push for the making of high-quality investment banks," Essence Securities analysts led by Zhang Jingwei and Jiang Zhongyu wrote in a note. "On the one hand they are bringing in strong foreign competitors and on the other they are promoting industry consolidation and encouraging Chinese brokers to grow in size."

While it's too soon to tell the fate of the top brokers, smaller firms are coming under greater pressure to be winnowed out, they said.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Taken together, the 131 Chinese brokers have combined assets equivalent to one Goldman Sachs and less than a third of Industrial & Commercial Bank of China, the nation's biggest lender. They are also far from being full-service investment banks, counting on mom-and-pop traders across the country for much of their revenue. The market is also fragmented, with the top five brokers capturing just about a third of the industry's revenue, according to Goldman research.

Representatives at Citic Group and Central Huijin's parent China Investment didn't immediately respond to requests seeking comment.

Citic Securities said in a filing late Thursday that it wasn't aware of any related information regarding press speculation about the possible acquisition of shares of CSC Financial by Citic Group. In a separate filing, CSC Financial said it hasn't convened any meeting of the Party Committee to consider and approve the merger plan as alleged in media reports.

Shares of CSC Financial rallied for a second day, gaining 11.7 per cent in Hong Kong as of 1.39pm and extending this year's increase to 68 per cent. Citic Securities was up 4.7 per cent, after rising 10.5 per cent on Thursday.

Central Huijin, a unit of China' sovereign wealth fund, currently owns 37.37 per cent of CSC Financial, while Citic Securities holds 6 per cent in the firm.

Citic Securities has led a series of acquisitions including a US$2 billion deal to snap up smaller rival Guangzhou Securities last year. Still, the Beijing-based firm generated 12.2 billion yuan (S$2.41 billion) in profit last year, a quarter of Goldman's.

The China Securities Regulatory Commission, led by former ICBC chairman Yi Huiman, said late last year that it wanted to create investment banks of an "aircraft carrier size" to compete with Wall Street, as well as to promote the international expansion of its own brokerage industry.

As part of the plan, the regulators are mulling granting brokerage licenses initially to some of the nation's biggest lenders, including ICBC and China Construction Bank, on a pilot basis, people familiar with the matter said earlier this week.

Meanwhile, the opening up of the nation's US$45 trillion financial industry this year to full foreign ownership will likely provide a fresh jolt to the sector, forcing consolidation and winnowing out weak players.

Global banks and asset managers are ramping up investments in the world's second-largest economy even as political tensions between the US and China on the coronavirus outbreak and a crackdown on Hong Kong escalate. JPMorgan Chase & Co was approved last month to take full ownership of its China futures unit, while Morgan Stanley and Goldman were cleared to take majority control of their onshore securities ventures in March.

With competition heating up, some securities firms are raising capital to expand traditional brokerage services by building out a broader menu of investment banking services that require more capital, such as market making and margin financing.

BLOOMBERG