It has never been easy for China's securities houses to make profits. And it is never easy for them to die.

Last year, 122 securities firms in China reported a total of more than 900 million yuan (US$109 million) in losses, their assets also shrinking.

Recently, about half of the securities firms that are members of the interbank market also filed negative interim results and said they could not make ends meet.

The situation was hardly any better in 2002, and 2001, in spite of a short boom in 2000, when the bullish run of the bourses pulled up brokering and underwriting income and overall profitability.

A number of companies have also been exposed as misbehaving for years, such as embezzling the guarantee funds of clients or irregular investment practices, leaving huge liabilities.

However, in spite of rather poor performances, most of them have managed to stay afloat.

Only a few small and regional securities firms have been driven out of business over the past few years.

For the "big brothers," such as Southern Securities, no matter how big their debts are, they always find a way out of their predicament.

The situation has troubled many. Investors complain. Clients whose funds are misused by the companies are anxious to get their money back.

Regulators are caught in a dilemma between the desire to crack down on irregularities and to save the businesses with more policy support.

Even some staff with securities companies choose to leave as they find the future dim.

Is there a way out?

To many, the answer is not a simple "yes" or "no". Defining the cause of the problems will certainly help.

The securities business in China has been placing emphasis on the wrong side of operations for many years, said Xu Gang, general manager of the research department of CITIC Securities.

In overseas markets, the core business of most securities firms is investment banking, or the selling side of the business. It is also a major profit source.

But in China, the situation is different.

When investment banking is under developed, many securities companies focus too much on brokering and proprietary business, which is the source of their present losses, especially when the stock market falls and investment decisions are made wrongly.

When internal control is fragile and information disclosure is insufficient, it provides conditions for insider trading, price manipulation and other fraud and creates a convenient milieu for firms to embezzle clients' funds.

Xu also suggested that the securities firms should keep their asset management business independent from investment banking to minimize risk. They should also follow relevant regulations and disclosure rules.

The operation model of many securities company is still not market-oriented. Their corporate governance is also poor, says Han Zhiguo, director of Beijing Banghe Fortune Research Institute.

Though the stock market is still not developed in China, it has been introducing market-driven rules and standards, so if the securities companies do not keep up, they will find themselves unfit for the market environment, he said.

Of course, many securities companies have complained that they do not have adequate funding and financial channels are very limited.

But Han said that even if the government gave fund injections and allowed more securities firms to become listed or issue bonds, it did not offer a magic cure for existing problems.

Finding a new profitable model for the business is an urgent matter.

Cultivating a credit culture and competitive environment is also crucial for the business' healthy and sustainable development and helps rebuild investor confidence dampened by a slew of scandals and irregularities.

Most importantly, the poor-performers should gradually withdraw, analysts said.

There have been signs that the industry is gradually moving in the right direction, though some say the pace of reform should be faster.

Since 2002, seven problematic domestic securities houses have been closed down or taken over by other securities firms.

Last year, more than a dozen firms were put on the securities watchdog's black list for "high-risk monitoring," which means they are being closely watched by regulators for potential risks in operation and management.

This January, authorities made a move to take control of scandal-hit Southern Securities, which, once a leading firm in the industry, had billions of yuan in debt that it could not pay and had also been caught appropriating client's funds.

But the present situation in cleaning up the market has not progressed as far as it should.

So far, Southern Securities is still in operation. Much of the debt to the State banks is ultimately to be written off.

Another industry big name, China Securities, which is also reported to have gigantic debts that it cannot pay back, was also rescued by the municipal government of Beijing recently.

A senior company official said China Securities is now safe and that the funding chain should be mended.

But it is hardly applaudable.

Administrative orders may help troubled securities firms in the near term, but they are not to cure all, said an industrial analyst, who declined to be named.

They will have to face market competition by themselves one day. And only the fittest will survive.

Already, foreign firms eyeing business potential in the sector are making quiet moves.

Goldman Sachs, for example, is reported to be in the final stages of preparation for a joint venture investment bank in the mainland, in which it is expected to get controlling rights. The venture would be based on an existing securities house that has financial problems.

The project is hopeful of getting the authorities' approval, a source said.

Several other foreign institutions, including CSFB, are also expressing similar interest.

Up to now, no foreign firm could get controlling rights in such securities ventures in China.

A company spokesman for Goldman Sachs declined to comment on the matter last week.

"But I would not be surprised to hear that Goldman Sachs could get a licence for an investment banking joint venture," said Fang Xinghai, deputy general manager of the Shanghai Stock Exchange.

It offers a good model for the revival of the problem-ridden securities companies and also gives foreign investors direct access to the business, he said.

Allowing foreign companies to acquire debt-ridden securities firms would also save the Chinese Government lots of money and rescue efforts.

With controlling rights, foreign institutions can apply their expertise to ventures and help improve corporate governance in the long term, said Fang.

The entry of this fresh force would also increase competition in the industry and force domestic firms to upgrade their management.

Some experts also said that securities firms that had no investment value and could not repay debt, should seek bankruptcy or other withdrawal channels.

But without an upgraded bankruptcy law and an efficient compensation system for the shareholders and investors, that would be hard to implement well.

Mergers and acquisitions seem to be more practical. It is generally expected in the next decade that there will be an increasing number of mergers and acquisitions among securities firms in China.

(China Daily August 2, 2004)