CHINESE securities brokerages enjoyed a bumper year in 2014 as a late rally in equity markets and further deregulation of China’s capital sector opened up wider business.

The brokerage industry was one of the big beneficiaries of the 52 percent surge in the CSI 300 index, which tracks the largest companies listed in Shanghai and Shenzhen. It was the best performing index among major global markets.

Shares of China’s 19 listed brokerages soared an average 161 percent last year, according to data calculated by Shanghai Daily. Hongyuan Securities, Pacific Securities, Changjiang Securities, Everbright Securities and Guoyuan Securities were the top five performers, each chalking up gains of more than 200 percent.

After shares of CITIC Securities soared 124 percent between November 11 and December 18, the market value of the brokerage rose to 360.8 billion yuan (US$58.2 billion), replacing Credit Suisse Group as the world's fourth-largest securities company after Goldman Sachs, UBS Securities and Morgan Stanley.

The last time domestic brokerages put in such an impressive performance was back in the 2007 bull market. That was before a prolonged stock market slump set in, eroding the trading commissions that underpinned industry revenue.

The current bull run for brokerages has been backed by strong earnings. In the first 11 months of 2014, the combined net profit of listed brokerages was 35.8 billion yuan, up 79 percent from the same period last year, according to data from Wind Information Co.

The November launch of the new trading link between Shanghai and Hong Kong stock exchanges unleashed high expectations among retail investors, helping drive up trading volumes and boost commission income, which contributed to more than one third of brokerage revenues.

“Brokerages will not have any problems doubling their 2014 earnings, thanks to the eye-popping trading volumes in the last month of the year,” said Liu Xing, an analyst with Capital Securities.

Sizzling growth

China Securities Depository & Clearing Corp reported that investors opened 119,258 new trading accounts a day in December, compared with the daily average of 54,071 in November. Total trading volume in Shanghai and Shenzhen averaged 799 billion yuan a day in December, up from 252 billion a day in the first 11 months of the year.

Aggregate revenue from proprietary businesses at listed brokerages in the first three quarters of 2014 rose 73 percent from a year earlier, according to Wind data. Income from underwriting also recovered after Chinese regulators rebooted the initial public offering market after a 14-month freeze.

New lines of businesses also helped brokerages recapture their swagger.

Margin-trading and short-selling businesses, which already were the third-biggest source of earnings, got a further boost last year as the stock market rally enticed more investors to take out brokerage loans to buy stocks.

UBS Securities said it expects income from both activities to have contributed about 20 percent of securities firms’ 2014 revenue.

With the good times rolling, speculation now turns to how long the current heyday will last after stock valuations rose to their highest level in more than four years. Heavy reliance on corporate earnings as weather vanes could make shares vulnerable to market corrections.

“We continue to view Chinese securities firms as cyclical stocks,” Richard Xu, a Hong Kong-based analyst at Morgan Stanley, wrote in a note. “A-share market performance and trading turnover are the biggest revenue and share-price drivers, despite ongoing new business launches.”

Xu estimates that 56-86 percent of brokerage revenues are linked with stock market performance.

Meanwhile, the growth of margin financing and short selling also faces some headwinds as China’s securities regulator tightens supervision, amid concern that rapidly expanding leverage could lead to undesirable market volatility.

However, analysts said securities firms are reducing their dependence on market conditions and trying to mitigate risk by diversifying business lines.

“We are bullish on brokerages in the long run because China’s effort to reduce reliance on bank lending and encourage funding directly from capital markets will unleash business potential for the industry,” said Cao Yu, an analyst with AVIC Securities.

China’s financial market has long been dominated by banks, whose lending accounts for more than 70 percent of total social financing. The landscape is set to change as the government steps up efforts to encourage other lending channels.

In the first three quarters of 2014, China’s equity financing increased 80 percent from a year earlier and fund-raising from bonds rose 68 percent, after the regulator introduced measures to lower financing costs, according to Haitong Securities.

“The rise of direct financing will drive brokerages’ investment banking businesses, including underwriting for IPOs and additional issuance and bonds,” Haitong said.

Securitization market

China’s booming securitization market also provides an enticing business prospect for brokerages.

The issuance of asset-backed securities rose to 213 billion yuan in 2014 from 16 billion yuan a year earlier, according to data from Moody's Investors Service.

The ratings agency said it expects the market scale to grow after regulatory authorities streamline registration procedures for the issuance of asset-backed securities by brokerage firms.

“Brokerages will be important participants in the securitization market, providing asset management, underwriting and market-making services,” Huatai Securities said in a report.

Huatai said the securitization business has the potential to boost industry revenue by 7 percent.

As new opportunities flourish, the securities regulator is also seeking to raise the leverage ratio for brokerages, enabling them to borrow more money to fund new businesses.

In August, the China Securities Regulatory Commission released draft document on risk-control rules for securities firms. It proposes to lower the minimum net capital-to-net asset ratio to 20 percent from the current 40 percent. Such a relaxation could potentially free up as much as 70 billion yuan of capital, analysts said.

With improving market sentiment and a flourishing industry environment, securities companies are rushing to raise new cash to capitalize on the bullishness.

Guosen Securities went public on the Shenzhen Stock Exchange last month after raising 7 billion yuan, the largest flotation in the A-share market since 2011. CITIC Securities said last month that it is planning to sell 1.5 billion new H-shares in Hong Kong to up to 10 investors via a private placement. Haitong Securities completed its share placement in Hong Kong, raising US$4 billion.

However, with opportunities come new challenges.

Chinese securities firms could face increasing competition. The securities regulator is contemplating a plan to lower the threshold for the industry, enabling the entry of more participants.

Securities Times reported earlier that the China Securities Regulatory Commission will soon release draft rules allowing private companies to obtain licenses for securities businesses.

Wei Tao, analyst with BOC International Holding Ltd, said any deregulation of the industry will have an impact on existing brokerages.

Liu with Capital Securities said increased competition could be the catalyst for accelerated restructuring of the brokerage industry.

“Brokerages that are weak and can’t keep pace with changes in the industry will be weeded out,” Liu said. “That will be conducive to future prosperity of the industry.”