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January 11, 2019

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Securities: slow going, bright future

China’s capital market is developing slower than expected with a slump in total revenue for the securities industry, but the sector still has great potential with mergers and acquisitions and industry integration, a new study says.

Affected by the market environment, total revenue for China’s securities industry has dropped sharply since 2015, McKinsey & Company said yesterday.

In the first half of last year, revenue dropped to only 126.6 billion yuan (US$18.5 billion), 11.9 percent lower than the same period in 2017.

In 2017, revenue was 311.3 billion yuan, down 5 percent from 2016. And the industry’s net profit margin fell to about 26 percent in the first half of last year.

Return on equity deteriorated significantly due to the combined effects of reduced revenue and shrinking profit margins, the report said.

The industry’s annualized ROE was only about 3.5 percent in the first half of 2018, compared with 6.5 percent in the year 2017, McKinsey said.

“Both profit margins and ROE of domestic brokerages are significantly lower than the international market level,” said McKinsey partner Huang He.

But the revenue structure of the industry has become more diversified.

And proprietary business has overtaken the brokerage business to become the largest source of income by the end of 2017.

“In addition, the degree of concentration is rising,” Huang said.

“Nearly 70 percent of the total profit in the industry in the first half of 2018 was concentrated in the top 10 securities companies.”

Employment fell in the first half of last year for the first time in almost two years.

“Although the industry is going through a cold winter, we believe that the development potential in the future is still very considerable,” Huang said.

Compared with developed international markets, China’s securities industry still has more room for improvement in terms of the diversity of products and services and overall leverage ratio.

The introduction of foreign investors will promote the institutionalization of the securities market.

At the same time, the entering of foreign securities companies with innovative products and services and advanced systems platforms will help boost the industry, Huang said.


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