By staff reporter Li Qing

From Caijing Magazine

A Chinese government agency in charge of rescuing distressed financial institutions is overhauling its securities business by selling one brokerage and tightening control over five others.

The politically colored moves by Central Huijin Investment Co. Ltd., financial details for which have not been released, reflect the firm’s allegiance to an April 2008 decision by the State Council, China’s cabinet, known as “one control, one holding.”

The directive, which limits a parent firm to a greater than 50 percent stake in only one securities firm, is designed to prevent monopolization of the industry.

Central Huijin plans to sell its 21 percent stake in broker Guotai Jun’an to the Shanghai government’s Shanghai International Group, which is already the firm’s largest shareholder with 23 percent.

Meanwhile, Central Huijin has taken full control of five securities firms, including CIC Securities and UBS Securities, which had been managed by its wholly owned subsidiary China Jianyin Investment.

The reshuffling leaves unanswered questions about the fate of investment bank China International Capital Corp. (CICC), in which China Jianyin owns a 43 percent stake and Morgan Stanley holds 34 percent.

Established in 1995 as China’s first, joint venture investment bank, CICC has focused on investment banking and wealth management. However, the firm’s brokerage business has been small, and it does not have a license for proprietary business.

CICC had a tough 2008 and reportedly plans to lower its headcount to save money. But the firm has been searching for a securities firm to expand its brokerage business. CICC’s recently appointed chairman, Li Jiange, told staffers at several internal meetings the firm should “stand its ground” and expand.

Other questions surround the future of Guotai Jun’an and Shanghai Securities, another broker owned by Shanghai International. Moves toward merging the two brokerages, which would be in step with the State Council directive, apparently have met resistance.

A source said after the overhaul “Guotai Jun’an will handle investment banking and proprietary trading. Shanghai Securities, as a subsidiary, will deal with all brokerage business.”

“Our consensus is that we should integrate and then pursue development,” said a Guotai Jun’an source.

It’s unclear whether Guotai Jun’an will be asked to give up its nationwide network of 113 brokerage windows – more than three times the number operated by Shanghai Securities. Each firm wants to grow, and their goals may clash; Guotai Jun’an wants to be a financial group, while Shanghai Securities wants to be a securities broker.

The merger proposal has met “great resistance,” the source said. “But at the moment, the two parties have reached an agreement that survival comes first. If we cannot integrate, everyone will be affected.”

Guotai Jun’an was a struggling brokerage when Central Huijin rode to its rescue in 2005, injecting 1 billion yuan. The investment was subject to a three-year lockup period expiring January 9, 2009.

Guotai Jun’an was created in the 1999 merger of Guotai Securities and Jun’an Securities. Most of the merged company’s original 51 shareholders were Shanghai government linked state-owned enterprises.

Central Huijin did not get involved in the day-to-day management of Guotai Jun’an and had one seat on the board.

“Huijin basically did not make decisions for Guotai Jun’an,” a Central Huijin source said. “We only restricted compensation to their senior executives.”

Insiders said Shanghai International is expected to pay Central Huijin “a premium price below the market premium” for its stake in Guotai Jun’an. “All of Huijin’s investments are based on political incentives,” an insider said.

“Huijin made the investment in Guotai Jun’an three years ago,” the insider said. “Based on the price at that time, a premium is proper.

“The key is how much premium is reasonable,” the insider continued. “Should the price to net asset ratio be two or three? Right now, we do not have a clue. But it should be no less than two.”

Beijing-based Central Huijin, established in December 2003 under State Council direction, makes equity investments in major state-owned financial enterprises without intervening in day-to-day operations.

The Ministry of Finance took control of Central Huijin from the People’s Bank of China by issuing bonds in September 2007. The acquired shares were then transferred to China’s sovereign wealth fund, China Investment Corp.

Central Huijin’s principal shareholder rights are exercised by the State Council, and its boards of directors and supervisors are appointed by and accountable to the State Council.

Central Huijin has stakes in a number of financial enterprises including five commercial banks, two securities firms, a financial holding company, an investment firm and a reinsurer.

China Jianyin was spun off in September 2004 during a China Construction Bank restructuring. Now owned by Central Huijin, its mission is to restructure state-owned securities firms by dealing with bad assets.