Can China create its own Goldman Sachs?

China has wanted its own Goldman Sachs for more than a decade. The country has a dominant presence in global industries from electric cars to solar panels. But it has yet to establish a globally competitive brokerage house.

Hopes had centred on the acquisition of CLSA, formerly owned by French bank Crédit Agricole, by China’s biggest securities firm Citic Securities in 2013. That did not yield the desired outcome. Changing sector trends and a blockbuster merger may yet provide a different answer to creating China’s investment banking powerhouse.

Shares of Guotai Junan Securities and Haitong Securities rose more than 100 per cent in morning trade in Hong Kong on Thursday after the duo unveiled their proposed merger terms. The combined group will be China’s largest, with $226bn in assets.

The deal aims to create greater global presence, with coverage in markets including New York, London and Tokyo. Beijing has long wanted local brokers to expand globally as they lost out on big deals from Chinese companies listing overseas. Since 2014, when ecommerce giant Alibaba raised $25bn in its US listing, Chinese companies have raised hundreds of billions dollars: local companies raised $15bn in the US in 2020 alone. Foreign investors were avid buyers of Chinese tech stocks until 2020.

Things have changed. Foreign markets and investors are contributing less to the top line of Chinese brokerages. Chinese companies have raised just $600mn in the US in the first half this year. Listings have been coming back to mainland Chinese markets. Foreign investors remain cautious on Chinese stocks.

That has meant more deals at home. In 2022, the Shanghai and Shenzhen markets surpassed the US in terms of initial public offering proceeds, with China topping the global IPO rankings. Retail investors have this year been a lucrative client base as they returned to local markets.

The large-cap mainland benchmark CSI 300 index is up 25 per cent in the past month. China’s A-share stock market trading volume hit Rmb3.4tn ($480bn), a new record, this week. The number of new account openings at local brokerages also hit a record high this month.

That means for China’s brokerages, scale is king. There are 140 local and foreign securities companies operating in China, 43 of them listed local houses, competing for the same investors. Brokerages will need to consolidate.

The combined entity of Guotai Junan and Haitong remains a relative minnow compared with Wall Street’s powerhouses. But it should gain greater operating efficiency and pricing power. And the merger comes at the right time to capture more fees and deals from the local market to give it an earnings boost, even without overseas expansion.

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