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Commission Cuts Unlikely to Boost Market
Stock market regulators announced a deregulatory reform on brokerage fees yesterday, which analysts said would influence brokerages' management philosophy while deepening their woes in the short term.

In a bid to develop the share markets, the China Securities Regulatory Commission said yesterday it will deregulate stock trading commissions next month, allowing brokerages to set their own fees with a cap of 0.3 per cent of the value of each trade.

Chinese brokerages are now required to charge a commission of 0.35 per cent for Chinese-only A-share trade and 0.43 per cent for B shares.

Analysts said the move is expected to boost turnover by reducing trading costs for investors, but they were doubtful if it could reverse a nine-month downward spiral.

"It cannot greatly spur turnover," said Yan Bin, an analyst with the Beijing Securities. "When there is a lack of investor confidence, no policy move like this can lift the market."

China's stock market hit a chronic downtrend in the middle of last year and is still dogged by worries of a liquidity crunch because of planned large-capitalization initial public offerings.

Major indices closed up on Thursday on insider news about the move but fell back yesterday.

Brokers and analysts said the move would further undercut brokerages' commission incomes, which account for an average of 60-70 per cent of their total incomes, pushing them deeper into the pains they have been suffering for months.

The market rout, which had wiped around 30 per cent off benchmark indices, has already set some brokerages on the brink of bankruptcy, observers said.

"That obviously is detrimental to brokerage firms," Yan said.

Under-the-table commission discounts have been a common practice among Chinese brokerage companies in a war for clients in recent years, as sluggish turnover eroded their profit margins and a tendency of banks and other financial institutions entering the stock trading business threatens their monopoly.

The new move, which puts a 0.3 per cent ceiling on trading commissions that may go virtually as low as 0.05 per cent to cover operational costs, makes the commission an open tool to woo clients and may trigger a commission-cutting race among brokerages, analysts said.

"The brokerages will just bring their discounts from the dark into light," Yan said. "But the lack of a floor is likely to trigger vicious competition."

The commission reform is a heavier blow on brokerages whose license covers only brokering but not underwriting or proprietary trading, leaving them as possible targets for mergers, other analysts said.

Yet brokerages acknowledged the painful reform, calling it a push in the right direction of competing through services rather than industry-crippling commission discounts.

Commission discounts offered by Chinese brokerages average as deep as 50 per cent and may go as high as 70 per cent, insiders said.

"It's not what we wanted to see, but it's what the trend points at," said Zhou Ling, a manager with Haitong Securities, citing the example of Hong Kong, where brokerages decide commission levels on their own.

"Now we can compete through commission rates openly, which will help improve our services like market analysis and consulting," Zhou said.

Beijing's more than 100 newly opened stock trading outlets, mostly by brokerages lusting after a share in the country's most profitable regional market, may face the most severe challenges because of their huge initial costs, Zhou said.

Prior to yesterday's announcement, brokerages and investors widely expected a fixed 0.2 per cent commission rate, which would have been a better scenario for brokerages, analysts said.

(China Daily April 6, 2002)

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