China Jianyin Investment Ltd., an investment arm of the central bank, paid 350 million yuan
China Jianyin Investment Ltd., an investment arm of the central bank, paid 350 million yuan (US＄ 43.2 million) on August 1 to buy the assets of bankrupt China Southern Securities (CSS), once China's fifth-largest brokerage firm.

The China Securities Regulatory Commission and the Shenzhen municipal government took over debt-ridden CSS at the beginning of last year, and its closure was announced in April 2005. Jianyin will form a new trading house after taking over CSS's 74 nationwide retail branches and investment banking units. The name of the new firm has not yet been decided, but it will include the word "Jianyin," according to an insider. As part of the deal, Jianyin will also take over the central bank's reinsurance business worth 8.7 billion yuan (US＄ 1.07 billion), which was formerly lent to the broker. The company plans to repay the reinsurance enterprise's debt within 20 years.

Parallel Restructuring Plans

Also on August 1, China Securities announced that it will undergo reorganization; CITIC Securities and Jianyin will invest 60 percent and 40 percent respectively to purchase the firm's stock brokerage business and form CITIC-Jianyin Securities. The two investors will also join forces to establish a Jianyin-CITIC Asset Management Corp., in which Jianyin will become the majority shareholder with 60 percent of the stock. CITIC will hold the remaining 40 percent. "The plan just got the nod from the State Council," an insider told Caijing.

Analysts say the two cases set examples for future restructuring efforts in China's poorly-performing stock brokerage industry. CSS, after selling its assets, will still be unable to repay its debts, and will have to declare bankruptcy.

Zheng Shaojie, president of Jianyin, will become the chairman of the new trading house, insiders told Caijing. As to who will serve as president of the brokerage, Niu Guanxing, who headed the leading group in charge of liquidating CSS and was recommended by the CSRC, was not chosen. Niu was originally the favorite candidate because his CSS takeover and liquidation group was envisioned as the future management team of the new trading house.

"Past practice was that the candidate recommended by the CSRC was accepted; now things have changed," said a member of the CSS takeover group. A CSRC official said, "We should respect the choice made by Jianyin since it is the shareholder."

Sources say Yang Minghui, executive vice president of CITIC Holdings Company, will become president of the reorganized brokerage. "We are taking over the central bank reinsurance debts but have not promised to take over the management team," said a high-ranking manager of Jianyin.

China Securities will be restructured differently from the CSS model. Jianyin and CITIC will not only shoulder the debts owed by China Securities, but will negotiate a debt repayment plan with the brokerage's creditors.

The Challenges Involved

By the end of last year, China Securities registered losses of about 6 billion yuan (US＄ 739.8 million), including 3.4 billion yuan (US＄ 419.2 million) in misused client funds. It also owed individual debts worth about 2.5-3 billion yuan (US＄ 308.3-370 million). The client funds largely belonged to institutional investors, who will be able to retrieve at most 80 percent of their investment, according to a CSRC official.

Insiders told Caijing that among the ten poorly-operated brokers to be restructured, only one will receive direct capital injection from Central Huijin, a wholly State-owned investment company that focuses solely on equity investments in the nation's major financial institutions. The other nine will be reorganized by Jianyin.

Sources say that a plan to restructure Galaxy Securities will establish a holding company, a new trading house, and an asset management company, similar to China Securities' restructuring plan. "Paring off bad assets and putting them in the new asset management company would improve the financial accounts, but would mix good and bad assets together," said an anonymous analyst.

Analysts say it is of vital importance to hold accountable those managers responsible for disastrous operations.

In the CSS case, for example, no senior managers have been held responsible. "No one will be held responsible for the bankruptcy," said a central bank official. Lin Yixiang, chairman of Beijing-based TX Investment Consulting, said: "If those responsible are not held accountable, no one will bother to make future decisions responsibly."

The securities market involves too much activity that cannot be disclosed, said Lin. A small case may lead to the discovery of a big financial corruption scandal. "Therefore," he said, "people just keep everything secret."

Li Shuguang, professor at the China University of Political Science and Law, said that although China does not have many legal provisions for financial fraud, the main problem now is loose enforcement of existing laws. "Whenever something happens, [policymakers] are afraid of displeasing big shots or causing market fluctuations," he said. "Those responsible must be punished severely to make an impression on other potential rule breakers."

(US＄ 1 = 8.11 yuan)

English version by Xin Zhiming