China brokerages lobby for buyout funds, alternative investment

SHANGHAI, March 2 Fri Mar 2, 2012 1:34am EST

SHANGHAI, March 2 (Reuters) - Chinese brokerages are lobbying the government to allow them to launch buyout funds and make alternative investments as the country's securities regulator plans to reinvigorate the struggling sector.

In recent meetings with the China Securities Regulatory Commission (CSRC), major brokerages have proposed that the watchdog expand their business scope, loosen capital rules, and give them more power in marketing and pricing initial public offerings, a CSRC document distributed to brokerages and seen by Reuters showed.

CSRC said it would waste no time to study suggestions that were feasible and make plans to implement them, the document said.

CSRC's newly appointed Chairman Guo Shuqing has vowed to deepen reform of China's capital markets and strengthen the brokerage industry, which is suffering from cut-throat competition and low profitability in a stock market that slumped 22 percent last year.

Although there's no guarantee that any of the brokerages' proposals will be adopted eventually, they will inevitably influence CSRC's thinking as the regulator maps out reform blueprints.

The brokerages suggest that the government should allow them to launch buyout funds and ease rules that currently cap securities firms' investment in a listed company at a 5 percent stake. Buyout funds typically acquire a controlling stake in a company with a significant part of the deal financed through borrowing.

The brokerages also seek to boost their wealth management business, hoping that regulators would expand investment scopes from stocks and bonds to alternative assets including private equity, real estate, commodities and art collections.

Meanwhile, the brokerages hope that regulators can support such innovative businesses by easing capital rules and tolerate higher leverage ratios.

Such suggestions, if adopted, could boost brokerags' asset management business by luring customers from rival institutions including banks, mutual funds, hedge funds and trust firms.

The brokerages have also made a series of proposals to improve China's IPO mechanism, which has been blamed for inflating prices of newly-listed shares and contributing to market speculation.

IPO underwriters should be granted the power to allocate the offerings and determine lock-up periods while a much bigger proportion of the new shares on offer should be reserved for institutional investors, they have suggested.

Such moves would boost the bargaining power of institutional investors and make IPO pricing more market-oriented, they argued.

Profit at China's 18 listed brokerages, including Citic Securities Co , Haitong Securities Co and Everbright Securities fell around 40 percent on average last year amid stock market sluggishness.

(Reporting by Samuel Shen)