Far in the lead is industry bellwether China International Futures Co Ltd (CIFCO), which is currently engaged in an industry-shaking reshuffle that will result in seven major brokerages it now partly owns becoming regional subsidiaries under the CIFCO umbrella.

Such a move, analysts say, is the trend in an over-crowded industry where intense competition among the estimated 180 brokerages has led to crippling commission cuts that have resulted in an industry wide loss in the first half of the year.

Turnover surged by a year-on-year 70 percent in the burgeoning industry in the first six months of 2002 but the overall loss skyrocketed to 50 million yuan (US$6 million), 10 times that of last year.

"Mergers are the trend after entry into the World Trade Organization ," said Xia Hai, a senior CIFCO official.

"The CIFCO restructuring is just the start. The significance is that it found us the direction for the future."

Xia said CIFCO's restructuring also includes an injection to bring its paid-in capital from 160 million yuan (US$19.2 million) to 600 million yuan (US$72 million), equivalent to that of a medium-sized securities brokerage.

Xia and other CIFCO executives declined to give further details, citing "some sensitive issues" related to the China Securities Regulatory Commission (CSRC), the industry watchdog.

"We are still working on it," said another senior CIFCO executive who declined to be named.

Sensitive issues probably include negotiations with CSRC over whether the restructured CIFCO can retain all its eight seats at China's futures exchanges in Shanghai, Dalian (in Northeast China's Liaoning Province) and Zhengzhou (in Central China's Henan Province).

If CIFCO loses the seven seats currently controlled by the other brokerages involved in the reshuffle, its trading capacity, especially concerning the open interest, will shrink dramatically.

"If that happens, we are in big trouble," Tao Jun, the transaction settlement general manager for CIFCO, has told Securities Times in the past.

Some analysts played down the significance of CIFCO's restructuring, saying it is part of a trade-off with CSRC that happened about two years ago when a frustrated CIFCO chose to close down a few futures affiliates for regulatory permission to open a similar number of stock trading outlets.

Hengyuan Securities Co Ltd, controlled by CIFCO's second biggest shareholder, an investment firm based in Suzhou, in East China's Jiangsu Province, won regulatory approval earlier this year to open branches in nine cities across the country.

"CIFCO had a huge structure while the outlook was gloomy," said a senior industry observer who declined to be named. "But the stock market was fairly robust back then."

China's 11-year-old futures industry has gone through painful consolidation for the past couple of years after rampant speculation led to a slew of market scandals.

"The significance (of CIFCO's reform) is that it provides an exit from the industry," the observer said.

With futures brokerages firmly clutching their licences despite slumping profits, Xia said legislative changes are needed to legalize "full-service" futures companies that are capable of proprietary trading and overseas brokering, as well as asset management and regular brokering.

(China Daily October 28, 2002)