The gap between Chinese and American brokers is a bit big, and the whole brokerage industry is only one of Goldman Sachs! How to build an aircraft carrier-level head broker？ Two paths to be stronger,

Author: Zhang Anyuan, chief economist of China Securities.

On November 29th, the CSRC replied to the proposal of the CPPCC, proposing to "make it stronger, better and bigger to build an aircraft carrier-level head broker"; Securities companies will be encouraged and guided to enrich capital, enrich service functions, optimize incentive and restraint mechanisms, increase investment in technology and innovation, improve international layout, and strengthen compliance risk management and control; Actively support all kinds of state-owned capital to inject capital into securities companies by subscribing for preferred shares, common shares, convertible bonds and subordinated debts, and promote the securities industry to become bigger and stronger.

The background of the above statement is obviously related to the huge gap in the development of brokerage industry between China and the United States. Although as far as a single financial institution is concerned, the expansion of scale has objective boundaries, and large and complete, small and beautiful all have their existence values. But influence is bound to be closely related to scale. "Too big to fail" in the financial field is not necessarily a derogatory term, and even every economy must have its "too big to fail" financial institutions. At present, vigorously developing direct financing is an important part of financial supply-side reform, and financial opening-up is accelerating, so it is necessary to put it on the agenda to build China’s world-class giant securities firms.

First, behind the development gap is the difference in the financial system.

In the past 30 years, the development of China’s brokerage industry is obvious to all, and the gap between China and the United States is obvious, and there is no sign of narrowing. At the end of 2018, there were 131 brokerage licenses in China’s whole industry; By the end of 2017, there were 3,801 dealer & broker in the United States. The total assets, operating income and total profit of China’s brokerage industry are similar to those of Goldman Sachs Group (about 63,000 yuan, 2.6 trillion yuan and 84 billion yuan at the end of last year). In 2018, Goldman Sachs Group employed 36,600 people, while the number of domestic registered securities practitioners reached 340,000 at the end of 2018, and the per capita output level was about one tenth of that of Goldman Sachs Group. The primary reason for the huge development gap is the difference between the financial systems of the two countries.

In view of the differences in economic, political, cultural and historical backgrounds, the financial systems of different countries are different. According to the differences in the roles played by financial intermediaries (usually called banks) and financial markets in the financial system, theoretical circles can be divided into two modes: Bank-Based represented by Germany and Japan and Marked-based represented by the United States and Britain.

Market-oriented financial model relies on mandatory information disclosure system, and must be based on perfect external restraint mechanisms such as laws and accounting systems. It is sensitive to price signals. The cost of capital is mainly determined by the market, and risks are mainly shared by different market entities. The political control of government forces over the financial system is relatively weak. The most typical financial institution in this model is the large international investment bank in the United States.

However, the bank-led model is not based on good public information disclosure. The information is mainly occupied by insiders, and the requirements for external legal constraints are relatively low. There are fewer market factors in the decision of capital cost, and the risks are mainly smoothed by sharing at different stages of the economic cycle. The government forces have relatively strong political control over the financial system. The most typical financial institution in this mode is the large state-owned commercial bank in China.

In sharp contrast with the gap between China and the United States, the total assets of China’s commercial banking industry have absolute advantages compared with the United States, and the ratio of total assets of the banking industry to GDP is also significantly higher than that of the United States. In 2018, the total assets of the four major banks in China were all over 20 trillion yuan, of which the total assets of ICBC were 27.7 trillion yuan and the contracts were 4 trillion US dollars (converted at spot exchange rate). However, the total assets of JPMorgan Chase, a local head bank in the United States, are 2.6 trillion US dollars, and Wells Fargo’s total assets are 1.9 trillion US dollars. The volume of mixed operation is still far less than that of China’s large state-owned commercial banks.

China’s securities firms can’t match American securities firms, and American commercial banks can’t match China’s commercial banks. In a sense, this phenomenon is a "feature" and not necessarily a "defect". Theoretically, it is hard to say that one financial system is absolutely superior to another. In the early stage of industrialization and urbanization, banks obviously have advantages in organizing and mobilizing savings funds. At present, China’s medium-level industrialization and urbanization process is coming to an end, and the financial model of mobilizing social funds to invest in specific fields on a large scale needs to be transformed into an equity financing model that is more conducive to encouraging innovation and sharing risks. This special era background requires us to be stronger, better and bigger, and to build an aircraft carrier-level head broker, which does not mean that there are some insurmountable inherent defects in the previous financial development model.

Second, a variety of specific reasons lead to the development gap

In addition to the essential differences in the financial system, the market size, regulatory environment and internationalization gap are the specific reasons for the development gap between China and the United States.

one

There is a big gap in market size.

China’s current GDP is about two-thirds of that of the United States. Since the financial crisis, China’s economy and financing market have developed rapidly, but the financial system’s emphasis on indirect financing has made the scale of the direct financing market of domestic securities firms 3-5 times smaller than that of the United States. According to the current market exchange rate, at the end of 2018, China’s net domestic credit was 29 trillion US dollars, exceeding the US’s 21 trillion US dollars. However, the total market value of stocks is about 6.3 trillion US dollars, which is equivalent to one-fifth of the total market value of American stocks of about 30 trillion US dollars. The stock of the bond market is 13 trillion US dollars, and the stock of corporate bonds is 2.9 trillion US dollars; It is equivalent to about $43 trillion in US bonds and one third of $9.2 trillion in corporate bonds. The difference in market size is bound to be reflected in the scale of institutions.

Comparison of Chinese and American Stock, Bond and Public Offering Markets (trillion US dollars)

Source: IMF, Wind

2

The regulatory environment is obviously different.

Since 2008, the mixed operation of American securities industry has developed rapidly, and head brokers have gradually absorbed deposits. In 2018, the total assets of Goldman Sachs were $931.8 billion, of which $158.3 billion came from customer deposits, accounting for about 17%.

China’s financial industry has obvious characteristics of separate operation and supervision, and brokers must continuously meet strict risk control index standards, including risk coverage ratio of not less than 100%, capital leverage ratio of not less than 8%, liquidity coverage ratio of not less than 100%, and net stable capital ratio of not less than 100%. These risk control indicators require higher net capital of securities firms, and the allocation and scale of capital occupation business such as self-operation and credit are limited. As a result, the net assets of China’s securities firms in the whole industry are three times that of Goldman Sachs Group, and the ROE (in terms of total profits) is only one third of the latter. At the same time, the capital replenishment ability of domestic securities firms is seriously insufficient, which limits the development of the industry.

The risk control index system of American-funded securities firms represented by Goldman Sachs Group is complex, including consolidated capital adequacy index requirements of systemically important financial institutions and industry indicators of subsidiaries. Comparatively speaking, the regulatory environment faced by American-funded securities firms is generally looser than that of China, and there is a lot of room for regulatory flexibility and statement adjustment.

three

The level of international operation is far from each other.

Headquartered in new york, Goldman Sachs Group has offices in more than 30 countries and regions by the end of 2018; 46% of its business headquarters are located abroad, with London, Tokyo and Hong Kong as regional operation centers; The income outside the Americas is around 40%, effectively hedging the domestic business risks in the United States. In contrast, the vast majority of domestic brokers only set up branches or subsidiaries in Hong Kong, and the head brokers have the highest proportion of overseas income, only about 15%. As for business ability and international influence, it is far from it.

Third, the conventional path is difficult to bridge the gap.

It is not a day’s work to improve the international operation ability of securities firms. The vast majority of international operations of domestic securities firms are based in Hong Kong, and the development environment is facing new uncertainties. As for the breakthrough of mixed supervision restrictions and adjustment of risk control indicators, it may not be the focus of regulatory policy adjustment for a long time. Relying on the expansion of the direct financing market, it is not a problem that the overall scale of China’s brokerage industry will surpass Goldman Sachs in the next few years, but it is a long way to go for the industry leaders to reach a similar level and position in terms of scale and competitiveness.

Generally speaking, the scale and development level of China’s head brokers are about the same as those of international advanced investment banks more than 20 years ago. If we talk about some important one-way indicators, the gap is even more significant. For example, in terms of total assets, CITIC Securities was about $95.16 billion at the end of 2018 (roughly converted at the current exchange rate), while Goldman Sachs’ total assets in 1996 were about $152 billion.

Goldman Sachs’ clients are mainly institutional customers in the United States and overseas. In 2018, 37% of its revenue came from institutional customer service. In 2016, the revenue from institutional customer service even reached 47%. Goldman Sachs organized its business framework with customer service as the center, which formed a dual competitive advantage of profitability and risk control. On the other hand, in China, due to the relatively high proportion of retail investors in the domestic stock market, the brokerage business income of domestic head brokers accounts for a relatively high proportion, and all business lines, especially brokerage and investment, are greatly affected by the market.

From its listing in 1999 to the financial crisis, Goldman Sachs developed at a high speed with the help of the wave of economic globalization and the improvement of its capital financing ability brought about by its restructuring and listing, and achieved a six-fold increase in total assets in ten years (1997-2007), which consolidated its leading position in the domestic industry. In the past ten years after the financial crisis, the volume of Goldman Sachs has increased by about 5%.

From the listing of CITIC Securities in 2003 to the financial crisis, the total assets expanded by about 16 times (2003-2007), and the cumulative growth in the decade after the financial crisis (2008-2018) was about 4.8 times. However, in the past three years, the growth rate of total assets has greatly slowed down, only increasing by about 6%. Other head brokers have even seen their total assets shrink in the past three years. Based on the above facts, I’m afraid we can’t expect to solve the problem of insufficient size of head brokers through limited industry increment.

Fourth, it is necessary to take multiple measures to build an aircraft carrier-level head brokerage firm.

Capital injection into securities companies is a necessary condition for becoming stronger, better and bigger brokers. Besides, more measures are still needed.

one

Merger and reorganization

Before the financial crisis, CITIC Securities acquired CITIC Jiantou Securities, CITIC Jintong Securities and Huaxia Fund to achieve rapid scale expansion. The rapid expansion of overseas business of Haitong and CITIC Securities is also closely related to M&A operations. American head brokers have also experienced frequent mergers and acquisitions in history. For example, Goldman Sachs acquired Spear, Leeds, & Kellogg, the largest market makers in NYSE, in 2000.

ROE, a domestic head brokerage, has obvious advantages in the whole industry. In 2018, there were about 7 A-share listed brokers with total assets of more than 300 billion yuan, and the ROE was concentrated between 6% and 8%, which was in the leading position in the industry, significantly higher than the average level of listed brokers and had the strength to initiate mergers and acquisitions. Since the beginning of this year, there have been many cases of different types of mergers and acquisitions.

China’s securities industry implements strict license management, and the occupation of license plates with strong administrative divisions is very scarce. On the one hand, it certainly increases the difficulty of market-oriented mergers and acquisitions, but on the other hand, it also provides special convenience for administrative means to promote industry integration. A number of provinces and cities holding more than two brokerage licenses seem to have the necessity and possibility to consider promoting the merger and reorganization of local state-owned holding brokers.

There are basically brokers in all provinces and cities across the country (number)

Source: Securities Association

2

Group expansion

In 2008, Lehman Brothers went bankrupt, Bear Stearns and Merrill Lynch were acquired by Bank of JPMorgan Chase and Bank of America respectively, and Goldman Sachs and Morgan Stanley began to accelerate their mixed operations. At present, the balance of Goldman Sachs’ debtors’ deposits accounts for about 17% of the total assets, and other head investment banks have a higher degree of mixed operation. The group background of commercial banks makes investment banks gain a higher volume advantage.

The reply to the proposal puts forward to support state-owned capital injection into securities firms, but which kind of state-owned capital injection is more conducive to the development of securities firms needs further screening. Perhaps it is most desirable for domestic commercial banks to inject funds into brokers. First, because China’s commercial banks have the advantages of scale, channels and customers, it is convenient for brokers to develop institutional business; Second, the combination of investment and loan and the development of financial subsidiaries of commercial banks increasingly need the cooperation of brokers; Third, the settlement funds of brokerage transactions still need to be kept by the third party of commercial banks, and liquidity endorsement cannot be separated from commercial banks. The above aspects obviously require the regulatory authorities to re-examine the current development policies of financial holding groups, and to some extent, there are new institutional breakthroughs. Article 43 of the Law on Commercial Banks (commercial banks are not allowed to engage in trust and securities investment business in China) may also need to be revised, otherwise commercial banks will still have to bypass overseas and invest in the equity of domestic brokers through wholly-owned subsidiaries abroad.

Millions of users are watching.

Global black night! Trump "goes to war" everywhere to win the wool of the world? US stocks hit their biggest decline in two months, while European stocks fell across the board, and the Asia-Pacific region was also cool.

Big event! The commercial housing in Shenzhen "11th District" is unfrozen, and 2 sets are restricted for sale for 5 years! In November, Super 20 Cities released a new talent policy, and the wind direction of the property market will change?

Heavy attack! The FTA has been upgraded, and the scope of zero tariff has been expanded to 75%! China took over the "economic fortress", which is also good for blessing. Let’s look at the China-Pakistan Economic Corridor.

Exclusive! The normal issuance of new shares will not be a great leap forward, grasp the rhythm and strength! To improve the activity of investment, there is no shortage of market funds, and the four major points focus on IPO.

China, a brokerage firm, is a new media under Securities Times, the authoritative media in the securities market. China, a brokerage firm, enjoys the copyright of the original content published on this platform, and it is forbidden to reprint it without authorization, otherwise the corresponding legal responsibility will be investigated.

ID：quanshangcn

Tips: You can view the stock market and the latest announcement by entering the securities code and abbreviation on the micro-signal page of the brokerage China; Enter the fund code and abbreviation to view the fund net value.

Original title: "The gap between Chinese and American brokers is a bit big, and the entire brokerage industry is only one enemy of Goldman Sachs! How to build an aircraft carrier-level head broker? Two paths to be stronger, better and bigger "