RPT-BREAKINGVIEWS-China’s financial captain hits M&A hurdle

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Ka Sing Chan

HONG KONG, Nov 24 (Reuters Breakingviews) - China’s financial captain is struggling to rally its troops. Beijing has tasked its sovereign fund, Central Huijin, with creating "two to three" world-leading investment banks by 2035. But a planned merger of three firms backed by the state giant looks too small. It hints at the challenges Huijin faces in consolidating the crowded financial sector.

The $19 billion China International Capital Corp 601995.SS on Friday announced it will acquire two smaller brokerages, Cinda Securities 601059.SS and Dongxing Securities 601198.SS, via a share swap. Terms were not disclosed, but the combined entity would have assets of more than 1 trillion yuan ($140 billion). That would transform the enlarged CICC into the country's fourth-largest brokerage by assets, behind CITIC Securities 600030.SS, the recently merged Guotai Haitong Securities 601211.SS, and Huatai Securities 601688.SS.

Even so, this latest deal falls short of expectations. CICC had been in talks to merge with a similar-sized peer, China Galaxy Securities 601881.SS – also backed by Huijin – Reuters reported in February, citing sources. That would have created a larger entity to better challenge global banks, including Goldman Sachs GS.N and Morgan Stanley MS.N, both of which have recently taken full control of their respective China businesses.

One reason for that deal not materialising may be cultural clashes, which are notorious in the financial industry. Despite Beijing's stated policy goals of consolidating the roughly 150 firms in the country's $1.6 trillion brokerage sector, major firms will balk at either having to absorb weaker rivals or being taken over. CICC, for instance, is an investment banking powerhouse with a strong global brand, whereas Galaxy is more domestic-facing. Moreover, many companies have shares on both Hong Kong and mainland bourses that trade at different prices, adding an extra layer of complexity. This was evident in last year's merger between Guotai and Haitong, which massively diluted the former's Hong Kong shareholders.

The pressure on Huijin to accelerate deals will probably increase. A reshuffle earlier this year resulted in the fund owning assets of more than $27 trillion, Breakingviews calculates, including stakes in seven domestic brokerages. CICC opting to combine with smaller peers signals there will probably be more of these rather than mega-mergers. That might check the consolidation box for Huijin, but it will be a long time before China has its own answer to Wall Street's powerhouses.

CONTEXT NEWS

State-owned China International Capital Corp said on November 20 it would take over Dongxing Securities and Cinda Securities via share swaps. The deal is set to create China’s fourth-largest securities house with combined total assets of more than 1 trillion yuan ($140 billion).

Central Huijin, the domestic unit of China’s sovereign fund, is the biggest shareholder in the three companies. It also directly and indirectly owns stakes in four other brokerages. In February, Reuters reported that CICC was planning to merge with China Galaxy, citing sources.

(Editing by Robyn Mak; Production by Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))