Analysis of Innovative Business

Innovative business of Chinese securities companies mainly includes securities margin trading, securities trader direct investment, and investment banking (IB) business. Being relatively new, innovative business only has a small percentage of the total revenues of securities companies. However, its appearance has diversified the profitability model of securities traders.

Securities Margin Trading Business

Securities margin trading business, also known as securities credit trading, refers to the practice by investors of providing collateral to a securities company with membership on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. They do this in order to borrow capital to buy securities listed in the same exchange before reselling them, or to borrow securities listed in the same exchange before reselling them. The securities margin trading business has the following features:

- Through free capital and securities, it provides customers with trading resources and then collects fees that are higher than in the brokerage business.

- After the realization of refinancing, it provides customers with trading resources through leverage, thus extending the operation leverage of the securities trader.

The bilateral trade profitability model to some extent enables the securities trader to be in better market conditions.

On March 30,2010, the Shenzhen Stock Exchange issued a notice about a securities margin trading pilot run, which was launched the next day. The first batch of securities companies designated for the pilot included Guotai Junan, Guosen, CITIC, Everbright, Haitong, and GF. The introduction of the securities margin trading business could magnify securities supply and demand, invigorate securities market trading, increase transaction volume, and enhance market liquidity, thereby bringing about more brokerage and interest revenues for securities companies. Product innovation opportunities can also derive from securities traders' engagement in securities margin trading, which makes it possible to lower the cost of proprietary business and carry out hedging operations.

The securities margin trading business has experienced stable operation since its introduction in 2010. The balance of securities margin trading rose rapidly. As of September 30,2011, the balance reached CNY 33.591 billion, accounting for 0.145 percent of the total market value. Most transactions were margin buying (see Figure 4.14).

On November 25,2011, the Shanghai Stock Exchange and the Shenzhen Stock Exchange officially released the Detailed Rules for Securities Margin Trading Operation, marking the familiarity of the securities margin trading business. The pool of underlying assets for margin trading was expanded to include 285 stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange, up from 90. Of those stocks, 70 were exchange-traded funds (ETFs). The China Securities Regulatory Commission also promulgated the Provisional Regulations on the Oversight and Management of Securities Financing Business, and securities finance companies have been officially founded. The promulgation of the series of policies implies further opening of the securities margin trading business and gradual establishment of supporting mechanisms.

Growth of Securities Margin Trading

FIGURE 4.14 Growth of Securities Margin Trading

Source: Wind Information Co.

As of 2011, the average daily financing purchase amount was only over CNY 1 billion, or 0.5 percent of the average daily market transaction amount (see Figure 4.15). With the familiarity of the securities margin trading business and further opening of the securities financing business, the transaction amount of securities margin trading saw a constantly rising percentage. (In the U.S. and EU markets, the amount of transactions made by financing

Securities Margin Trading Volume

FIGURE 4.15 Securities Margin Trading Volume

Source: Wind Information Co.

traders accounts for 18 to 20 percent of total stock market transactions. In the Taiwan market, the percentage sometimes rises to 40 percent.)

 
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