The recent stock market rally is expected to open the door for more Chinese enterprises to tap the capital market for fresh funds.
Capital market experts say that the recent rally has brought life and hope after two years of drought brought about by excessive borrowings from banks to finance growth while equity funding was largely choked off by the prolonged slump. The biggest beneficiaries of this rally are brokerages as they have a slew of instruments at their disposal to raise funds, experts say.
Adding further credence to the view was the report that China’s largest stock brokerage CITIC Securities plans to raise 40 billion yuan ($6.4 billion) by issuing a mixed bag of fixed-interest debt instruments over the next three years in domestic and offshore capital markets.
Industry sources say the funds CITIC intends to raise will help finance its ambitious expansion into underwriting and other activities, especially loans to margin trading customers, which has become an increasingly lucrative business for mainland stockbrokerage firms.
CITIC is not the only brokerage that finds itself in such an advantageous position. Several others have announced plans to raise a combined 16.6 billion yuan by issuing bonds since the beginning of this year. That compares with the 14.4 billion yuan raised by seven listed securities firms in 2012, says a report by iFind, a financial information product developed by Zhejiang Hithink Flush Information Network.
“Listed companies will have stronger financing demands this year, unlike 2012, particularly those in sectors like energy, material, construction, property development, traffic and transportation, and public utilities,” says Guo Hui, an analyst with Donghai Securities.
The fund-raising boom is widely expected to improve the financial structures of many Chinese enterprises and create huge underwriting and other opportunities for the large domestic stockbrokerages. Most of them have seen their business going through the wringers for over a year now, due to the dismal capital market conditions.
Foreign investment banks, brokerages and other financial businesses can also expect a windfall, as many mainland enterprises are keen to tap the foreign capital markets for raising funds.
So far, 13 listed companies have raised 45.4 billion yuan through private placement of new shares this year, half of which was contributed by the Industrial Bank issue. Another 24 have also revealed plans to issue new shares in an effort to raise an aggregate 26.3 billion yuan, according to statistics from Wind Information, a financial information service provider.
Meanwhile, 23 listed companies, including CITIC Heavy Industries and Air China, have raised a total of 42.5 billion yuan through bond issues, Wind figures showed. Another 15 enterprises have announced bond issue plans totaling 113.65 billion yuan.
“We expect the total funds raised from the capital market in 2013 will exceed that of the previous year by a wide margin,” the research firm says.
Chinese listed companies raised 1.02 trillion yuan of funds through their financing activities in the A-share stock markets in 2010, the China Securities Regulatory Commission said in a recent statement.
However, analysts and authorities still think the scale is too small.
Guo Shuqing, chairman of the China Securities Regulatory Commission, says that “there is an internal structural imbalance in the financial industry”.
The most pressing problem is over-dependence on the indirect financing system and weakness of direct financing, he says.
By mid-2012, loans and notes financing made up 80 percent of the total social financing, while barely 20 percent came from stocks and bonds, the commission says.
By the end of 2011, outstanding bank loans accounted for 54 percent of outstanding social financing, while outstanding corporate stock capitalization and bonds made up only 26 percent.
“This ratio is much lower than 73 percent of the US and 62 percent of the UK, where direct financing has played a dominant role,” Guo says.
Aggregate corporate debt has already exceeded 110 percent of GDP, compared with the 90 percent ratio that is widely considered the upper limit within the margin of safety, says Yin Zhongli, a senior researcher at the China Academy of Social Sciences.
“Any large-scale program to fuel economic growth with easy credit could backfire badly on the economy as a whole,” he said in a recent article.
China Securities Finance Corp has signed contracts with 22 securities companies under a pilot program for refinancing with total credit limits of more than 15 billion yuan, says a recent report in the Securities Times.
As many as 52 securities companies, or 70 percent of companies with a securities margin trading business, have joined the pilot program.
The outstanding amount of CITIC’s margin trading for customer business surpassed 10 billion yuan in 2012, growing nearly three times from the 2.62 billion yuan earlier that year, a CITIC official said on condition of anonymity. “This sector is growing even faster with two more subsidiaries approved to operate this business,” the official added.
China started a pilot program of margin trading in early 2010 and then expanded it. Securities companies are approved to lend stocks and money to investors under the program.
Since most of the overseas brokers are scaling back their brokerage services because of the uncertain market conditions, it is the perfect time for Chinese companies to seize the opportunity and provide foreign clients with securities lending and other cash services — such as securities margin trading, improved risk management and consultancy — Yin Ke, vice-chairman of CITIC Securities, said recently.
In July, CITIC Securities agreed to buy Credit Agricole’s CLSA unit for $1.25 billion, and completed purchasing a 19.9 percent stake in the brokerage for $310.3 million.