With the stock market showing signs of a rebound, Chinese brokerage firms are in an industry-wide integration frenzy that is expected to reach the boiling point over the next few months.

The development is part of the government-initiated reform of the securities industry and will have a far-reaching impact on the capital market.

One of the most closely watched transactions in the general reshuffling is the proposed merger of Beijing-based China Minzu Securities, a brokerage firm directly supervised by the China Securities Regulatory Commission (CSRC), and Shenzhen-based Jinyuan Securities Company, a firm controlled by the Capital Airport Group Company.

"The headquarters of the new company will be in Beijing and we plan to get listed in the near future," a source close to the companies told China Daily, who refused to be named.

Central Huijin Investment Co, an arm of the country's sovereign wealth fund, is also a key player in this round of merger and acquisition activities.

The source said China Jianyin Investment Co, the wholly owned subsidiary of Central Huijin, has completed the transfer of 100 percent of its shares in China Jianyin Investment Securities to Central Huijin.

Earlier, it was reported that China Jianyin Investment Securities would soon become the wholly owned unit of Central Huijin.

There are also reports that Qilu Securities, another brokerage firm invested by China Jianyin Investment Co, would be brought under the Central Huijin fold soon.

"The integration is partly the requirement of the regulators, but more importantly, it was the need for market-oriented reform. The securities companies will follow the jungle law to conduct merger and acquisition activities and the competitive ones will become more and more stronger," said Li Daxiao, director with Research Institution of Yingda Securities.

To avoid related party transactions, the State Council, the country's cabinet, rolled out the supervision and management rules for securities firms in April 2008.

The rules specified that securities firms couldn't operate in the same business if the same shareholder controls them. Since then, securities firms have been pursuing the integration route.

Currently, there are about 107 brokerage firms in China and 29 are controlled or invested by eight mega investors. Among this, Central Huijin Investment Co and China Jianyin Investment Co have the maximum investment.

In 2004, about 31 badly managed securities firms were on the edge of being bankrupt. For stabilizing the capital market, the government decided to dispose these companies and most of them were taken over by Central Huijin Investment Co and China Jianyin Investment Co.

Central Huijin has invested in three large-scale securities firms, China Galaxy Securities Company, Shenyin & Wanguo Securities and Guotai Jun'an Securities.

China Jianyin Investment Co invested in seven firms viz. China Jianyin Investment Securities, China International Capital Corp (CICC), Hongyuan Securities, CITIC China Securities, UBS Securities, Southwest Securities and Qilu Securities.

Since the investment of Central Huijin involved many industry heavyweights, it's said that the securities watchdog allowed it to meet the regulations on investment over a five-year transitional period.

Central Huijin Investment Co was free to offload the shares in Guotai Jun'an Securities in January at the end of their three-year contract. Shanghai International Group (SIG), the holding company of Shanghai State-owned Assets Management Co, is likely to be a potential buyer, according to reports.

However, both the parties involved haven't yet clinched a deal.

Industry analysts said Guotai Jun'an Securities is planning to go public and hence investors may not be in a hurry to offload the shares.

Experts predicted that the industry integration would benefit in the long-term development of a healthy capital market.

"The landscape of the securities industry could see a change after Central Huijin shifts its shareholdings in these large-scale brokerage firms. It will be natural for more industry heavyweights to emerge in the near future," said Li Xiangdong, analyst, Minsheng Securities Co.

(China Daily June 2, 2009)