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Commission Reform a Long-term Mission
The recent reform package for brokerage fees will accelerate the competition among securities companies, but further ownership reforms are badly needed to help the sector embrace market rules, said an article in the China Economic Times.

The floating commission system introduced in April brought shockwaves to securities brokers as it signals that the industry has started to dance under corporate market practices.

According to the announcement jointly issued by the State Development Planning Commission, the China Securities Regulatory Commission and the State Administration of Taxation, brokerage fees would be allowed to float under the 0.3 percent ceiling from May 1.

Compared with the fixed commission system, the scheme is obviously a big leap forward towards standard securities transactions that conforms with international practices and market rules, the article said.

However, to some extent, the introduction of the commission reform package is not well-timed. It will deal a heavy blow to some domestic securities companies, the article said.

Up till the end of 2001, the capital fund of about 100 domestic securities companies only amounted to around 90 billion yuan (US$10.9 billion) and their total assets stood at 300 billion yuan (US$36.32 billion). Compared with their foreign counterparts, such as Merrill Lynch, with total assets of about US$330 billion, the home players are too weak to withstand international competition.

Besides, they heavily depend on traditional service items for revenues. The brokerage fees often make up 30-40 percent of their total income, while the core business of giant overseas investment banks are often mergers and acquisitions that can yield high profits.

It is the first year after China became a WTO member and domestic securities companies are still licking their wounds as their bad debts have accumulated due to a volatile and deflated stock market last year.

Thus, the reform package will deprive them of a chance to catch their breath and make due preparations before the entrance of foreign brokerage giants, the article said.

The original objective of the reform probably would be to curb the malpractice of commission kick-backs and hence customer prejudice and corruption.

However, charging disparate fees depending on the clients' investment scale is a reasonable market practice. And it is also quite normal for big securities firms with high prestige to demand higher fees than small and less established companies.

The real question behind corruption is not whether there are commission kickbacks, but who takes away the discounted amount - the investing company or the person in charge of the transaction.

The reform package should have been aimed at standardizing and making transparent the commission kickback process, instead of just setting a floating scale of commission fees.

Moreover, the commission reform package cannot fully break the monopoly in the sector, the article said.

The restrictions on market entrance have barred commercial banks, joint-ventures and IT companies from China's securities brokerage business.

The commission reform may lead to competition among home securities companies but the industrial monopoly still remains intact.

Moreover, it seems that all the domestic financial institutions are oriented towards the demands of State-owned enterprises.

At present, the securities brokerage market is dominated by State-owned companies whose major clients are State-owned enterprises listed in the Shenzhen and Shanghai stock markets.

The State-owned commercial banks are also geared to the demands of State-owned companies.

And the question is: who will provide services for private business establishments?

Without ownership reforms, such situations will continue, the article said.

To make the matter worse, as long as the ownership is not clearly defined - which means the responsibility for the performance of securities companies is not clearly defined - there is a great possibility that State-owned securities companies will act without taking the consequences into serious consideration. It is highly possible for them to get trapped in the vicious cycle of price wars.

Immediately after the introduction of the reform package, seven major home brokers, who took 30 percent of the total brokerage transaction volume in the market, held meetings and signed joint service agreements on the securities brokerage business.

No matter what the stated objective, the real incentive is the fear of chaotic competition.

And some small companies have already shouted shocking slogans of "zero commission" or "annual fee system."

The average minimum commission rate announced by big brokers is around 0.22 percent. Though it is not as low as the market expected, in the absence of ownership reforms, more dire competition, like that among home electronic appliance producers, will be staged in the securities brokerage market sooner or later, the article said.

(China Daily June 6, 2002)

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