Business in China is booming, finds KPMG
31 July 2014 Beijing
Image: Shutterstock
The combined margin financing and securities lending activity among 115 Chinese securities brokers increased a staggering 341.71 percent between the end of 2012 and the end of March this year, according to KPMG.
Its recent survey of the 2013 financial statements of 115 Chinese securities brokers found that their combined margin financing and securities lending balance increased from RMB 89.52 billion ($14.5 billion) to RMB 395.4 billion ($64.06 billion).
On its own, the balance of margin financing had reached RMB 392.63 billion ($63.62 billion) by the end of March 2014, a year-on-year increase of 144.12 percent. Securities lending amounted to RMB 2.77 billion ($448.78 million), slightly lower than the end of 2013.
The credit business of Chinese securities firms “grew spectacularly” in 2013, according to KPMG. Margin financing and securities lending has become the biggest contributor, with 84 licensed brokers now permitted to conduct the business.
The balance of margin financing and securities lending on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) totalled RMB 396.5 billion ($64.24 billion), “up a staggering 343 percent from last year”.
The turnover of trades on margin financing accounted for 8.99 percent of the total turnover of the A-share market.
Securities Association of China figures show that the brokers’ interest income from margin financing and securities lending was RMB 18.46 billion ($2.99 billion) in 2013, accounting for 11.59 percent of the total turnover (4.05 percent in 2012).
This means that margin financing and securities lending were second only to the net income from securities brokerage and proprietary trading.
KPMG said: “We expect there to be large room for growth in the share of revenue from margin financing and securities lending as the business has become a new profit driver, making an increasingly significant contribution to the overall performance of brokers.”
The audit firm attributes the “dramatic growth” of margin financing and securities lending in 2013 to “the increasingly diverse” range of eligible securities available on SSE and SZSE.
Eligible stocks stood at 711 as of the end of April 2014, which was more than double the number in 2012.
The investment threshold has also been lowered gradually, further expanding the scope of eligible investors and attracting more retail investors. By the end of 2013, there were 2.67 million credit accounts registered for margin financing and securities lending, up 170 percent from 2012.
KPMG did note that as the credit business among the Chinese brokers developed, some vied for more business at the expense of compliance, which attracted the attention of regulators.
The China Securities Regulatory Commission conducted two rounds of inspection on margin financing and securities lending, in October 2013 and April 2014, “and discovered a variety of problems”, according to KPMG
“[These] including longer-than-permitted maturities, trading with unqualified clients and delays in mandatory liquidation of clients’ positions despite insufficient margins. The steep fall of Changjiu Chemical stocks also highlighted the quality issue among underlying securities.”
“The facilitation of healthy growth in the rapidly developing credit business is a challenge faced by both brokers and regulatory authorities. To achieve this, ways must be found to control the default risk … to strengthen credit risk management and tools, and to expand the financing channels for brokers while balancing business risks.”
Its recent survey of the 2013 financial statements of 115 Chinese securities brokers found that their combined margin financing and securities lending balance increased from RMB 89.52 billion ($14.5 billion) to RMB 395.4 billion ($64.06 billion).
On its own, the balance of margin financing had reached RMB 392.63 billion ($63.62 billion) by the end of March 2014, a year-on-year increase of 144.12 percent. Securities lending amounted to RMB 2.77 billion ($448.78 million), slightly lower than the end of 2013.
The credit business of Chinese securities firms “grew spectacularly” in 2013, according to KPMG. Margin financing and securities lending has become the biggest contributor, with 84 licensed brokers now permitted to conduct the business.
The balance of margin financing and securities lending on the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) totalled RMB 396.5 billion ($64.24 billion), “up a staggering 343 percent from last year”.
The turnover of trades on margin financing accounted for 8.99 percent of the total turnover of the A-share market.
Securities Association of China figures show that the brokers’ interest income from margin financing and securities lending was RMB 18.46 billion ($2.99 billion) in 2013, accounting for 11.59 percent of the total turnover (4.05 percent in 2012).
This means that margin financing and securities lending were second only to the net income from securities brokerage and proprietary trading.
KPMG said: “We expect there to be large room for growth in the share of revenue from margin financing and securities lending as the business has become a new profit driver, making an increasingly significant contribution to the overall performance of brokers.”
The audit firm attributes the “dramatic growth” of margin financing and securities lending in 2013 to “the increasingly diverse” range of eligible securities available on SSE and SZSE.
Eligible stocks stood at 711 as of the end of April 2014, which was more than double the number in 2012.
The investment threshold has also been lowered gradually, further expanding the scope of eligible investors and attracting more retail investors. By the end of 2013, there were 2.67 million credit accounts registered for margin financing and securities lending, up 170 percent from 2012.
KPMG did note that as the credit business among the Chinese brokers developed, some vied for more business at the expense of compliance, which attracted the attention of regulators.
The China Securities Regulatory Commission conducted two rounds of inspection on margin financing and securities lending, in October 2013 and April 2014, “and discovered a variety of problems”, according to KPMG
“[These] including longer-than-permitted maturities, trading with unqualified clients and delays in mandatory liquidation of clients’ positions despite insufficient margins. The steep fall of Changjiu Chemical stocks also highlighted the quality issue among underlying securities.”
“The facilitation of healthy growth in the rapidly developing credit business is a challenge faced by both brokers and regulatory authorities. To achieve this, ways must be found to control the default risk … to strengthen credit risk management and tools, and to expand the financing channels for brokers while balancing business risks.”
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