Improving Operating Environment Boosts China’s Securities Industry | securities, china
In September 2021, Fitch Ratings revised upward the assessment of the operating environment of Chinese securities companies from “bb” / Stable to “bbb-” / Stable. Jonathan Lee, Managing Director and Asia-Pacific Head of Non-Bank Financial Institutions at Fitch Ratings, discusses the implications for self-credit rating assessment of Chinese securities companies.
1. How does Fitch analyze the operating environment of Chinese securities companies?
Fitch rates the operating environment (OE) of China’s securities industry as “bbb-“. This is the result of the positive and negative adjustments made to the basic implicit OE score in the ‘bb’ category which is derived from the latest GDP per capita ($ 10,235 in 1Q21) and the percentile ranking of the ease of doing business. of the World Bank (83.6, January 2021).
We made positive adjustments to reflect China’s “A +” / Stable sovereign rating and the resilience of its economy. Nonetheless, the high leverage of the system and inefficient distribution of credit continue to pose risks to the financial system as a whole, although they are diminishing. These, along with structural issues related to financial transparency, continue to contribute to the five-notch gap between the OE score and the sovereign rating.
2. What motivated Fitch’s review of the assessment of the operating environment of Chinese securities companies?
The upward revision reflects China’s long period of relative strength in macroeconomic stability among the largest economies, evident during last year’s pandemic. It also reflects, in an important way, the gradual strengthening of regulations that deal with risks related to the financial system, resulting in the improvement of the risk profiles of securities companies. The regulatory crackdown on shadow financing activities has helped contain the build-up of systemic risks in the financial system.
The potential risks of securities companies that arise from serving as credit conduits to channel funds provided by banks to avoid regulatory oversight have been significantly reduced from 2017 levels. The removal of implied guarantees strengthens also the operational environment.
3. What does Fitch think of the regulatory strength of the securities industry?
Fitch takes a positive view of regulatory developments in the securities industry that address potential systemic risk and promote a culture of risk. The China Securities Regulatory Commission (CSRC) has imposed risk measures to control the absolute level of trading and lending exposures of securities companies as part of its active monitoring of their risk exposures. These, along with the minimum loan-to-value ratio requirement for riskier equity reverse repurchase transactions, will help contain concentration risk and, ultimately, credit and market risk. if these measures are carried out correctly.
The annual rating of securities companies by the CSRC also reflects the regulatory emphasis on risk control. The assessment is based primarily on the performance of securities companies in terms of risk management and compliance, in addition to other measures of business and financial performance. Nevertheless, the lack of detailed disclosure on the rating methodology has limited its visibility and applicability by external parties.
4. How will regulatory developments and financial reforms affect the business prospects of securities companies?
The Chinese government’s 14th Five-Year Plan for 2021-2025, which outlines its economic and social development goals through 2035, says increasing the proportion of direct financing is key to China’s financial reform. Direct financing could reduce the over-reliance of the financial system on bank loans, prevent financial risks associated with credit-fueled economic growth, reduce moral hazard and improve transparency in the capital market. Fitch believes that promoting direct funding will help improve the efficiency of capital allocation in the system, instill market discipline, and curb implicit government support.
Fitch expects the political campaign to benefit investment bank income from securities companies as market demand increases. This, together with the update of the Securities Law to change the approval systems for initial public offerings (IPOs) and corporate bonds to registration-based systems, will lead to increased differentiation of franchises in the investment banking industry, as market players place more emphasis on prime underwriters. “Capacity and reputation.
5. What are the prospects for the Chinese securities industry in terms of competition and market consolidation?
Changes in the regulatory environment will encourage the development of larger franchises and intensify industry consolidation. The sheer size of China’s capital markets will make it easier to host a number of large securities companies with strong balance sheets.
The strengthening of the regulatory environment and deepening of markets are likely to benefit securities firms with strong investment banking and asset management franchises, as well as those with strong investment technology capabilities. information. The latest regulatory developments, which focus on risk management and compliance performance, are likely to help large securities firms improve their risk infrastructure, strengthen self-regulation and temper risk cultures.
6. How will the higher rating of the operating environment affect the credit profile of securities companies?
The stable macroeconomic environment and regulatory progress are conducive to credit for the stand-alone credit strength of securities companies. Fitch sees the corporate profile of a Chinese brokerage firm as an increasingly important differentiator, as changes in the regulatory environment will encourage the development of larger franchises and intensify industry consolidation.
The improved OE score will benefit the assessment of the financial profile of Chinese securities companies, based on Fitch’s multi-level financial benchmarking ratios. Chinese brokerage houses with leading franchises and strong financial credentials will increasingly have stand-alone credit profiles assessed in the ‘bbb’ range under an improving OE, reflecting their control framework. seasoned risks, the strength of their franchise and their ability to seize growing business opportunities in several businesses including securities brokerage, investment banking and asset management.
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