The Shenzhen-based China Merchants Securities (CMS) has been given the nod from market watchdog China Securities Regulatory Commission to purchase the Hong Kong-based Merchants Securities.

It will be the first time a domestic bourse has set up an overseas branch, according to CMS yesterday.

The two brokers both belong to the China Merchants Group, but are independent from each other.

The purchase is a strategic step for CMS to enter the international market, said Yang Kun, the firm's president.

Merchants Securities (Hong Kong) is among the top 70 of the 500 brokers in Hong Kong.

CMS is among the top 10 domestic securities firms and takes part in underwriting, proprietary trading and brokering. Last December, because it reached the regulator's standards for pilot brokers, it enjoyed favorable policies for development and is allowed to experiment with product innovation.

Last year, CMS had a profit of 661.6 million yuan (US$80 million), ranking fifth among domestic brokers.

However, the domestic broker sector generally is not doing so well. Last year 114 brokers in China lost a total of about 15 billion yuan (US$1.8 billion).

About half of China's 130-odd brokers are reportedly "problematic."

The purchase will diversify CMS's business and is more of a guarantee of good performance, said Xu Gang, manager of the Research Department of China Securities.

At the moment, the sluggish domestic market provides limited room for brokers to make a profit.

But if a broker is allowed to do business overseas, the playing arena will be greatly enlarged, he said.

And by operating in two markets, risks are also dispersed, he said.

This strategy could be a good model for other domestic brokers, said Dong Chen, a senior analyst at China Securities.

Nowadays, every company is internationally oriented. But in terms of the securities market, domestic brokers lag far behind in terms of exploring the overseas market, he said.

Many foreign investment banks have entered the Chinese market and many are keen to find new entry points and widen the scope of their operations. But this is the first time that domestic brokers have gone away from the mainland, he said.

The analyst also pointed out that domestic brokers have advantages when operating overseas.

When regulators relax current restrictions and allow mainlanders to buy overseas shares, brokers with overseas branches will have the chance to make a lot of cash, Dong said.

Besides the overseas purchasing, CMS also got approval from the central bank to issue 840 million yuan (US$101.6 million) of short-term bonds in the inter-bank market last month.

(China Daily July 6, 2005)