China's besieged brokerages are gaining broader access to the bond market for capital replenishment, but analysts say more reform efforts are needed to help the industry out of difficulty.

Everbright Securities, the securities arm of financial services provider China Everbright Ltd, said yesterday it had won regulatory approval to issue a maximum of 760 million yuan (US$91.8 million) in five-year bonds via private placements, making it the fourth local brokerage to issue bonds.

Haitong Securities Co Ltd, the mainland's largest by paid-in capital, CITIC Securities and Great Wall Securities Co Ltd became the first batch to be given the green light to issue bonds in March.

"The need for capital replenishment is urgent for brokerage companies," said a senior analyst with a leading domestic brokerage, who wished to remain anonymous. "Nearly all of them face the problem of inadequate capital levels."

The China Securities Regulatory Commission allowed securities brokerages to issue bonds late last year, giving them a long-anticipated channel to raise long-term capital.

China's 126 securities companies are allowed to raise a combined 45.4 billion yuan (US$5.5 billion) in bond issuances. They are allowed to sell bonds worth no more than 40 percent of their net assets, which totaled 114 billion yuan (US$13.7 billion) at the end of last year.

The policy relaxation was welcomed by securities firms, which are struggling from a bearish market that has lasted several months.

Nearly all the brokerages rely heavily on brokering to generate revenue, but market turnover is paltry compared to a few years ago. The benchmark Shanghai composite index has shed 21 percent since early April on fears of a fall-out from government-ordered credit curbs.

Yet only a small number of them are qualified to issue public bonds. Only around one-third of brokerages had net assets of more than 1 billion yuan (US$120 million) at the end of last year, while fewer of them made a profit last year. Those failing to meet these requirements can only issue bonds through private placements.

All the three that had issued bonds sold through private placements. But insiders said brokerages sold far less in bonds than the amount they applied to regulators to sell.

"The market is so bad that you do not know what to use the funds for," said one insider.

Besides troubled brokering operations, securities firms' poor profitability and tarnished reputation are hampering their asset management business. Even the traditionally safe underwriting business is getting into troubled water, with some underwriters having recently failed to sell their quotas in new share offerings.

"The problem is not simply about fundraising channels," said the analyst with the leading brokerage. "Policymakers need to rethink the system."

(China Daily July 15, 2004)