China brokerages: easier, faster listings boost earnings outlook  

Traders calling in sick with Covid-19 in Beijing had depressed trading volumes when China first reopened its economy in December. A recovery in local economic activities — and traders’ health — has boosted local stocks this month. Regulators want to turbocharge that rebound in the local $11tn equity market.

Foreign investors have noted a change in tone from Beijing about regulation and economic expansion. A recent Morgan Stanley poll of its global clients suggested the bulk expected China to drive a global economic recovery.

Global funds have already shifted Rmb29bn ($4.3bn) into China’s stock market this year, as sectors laden with regulatory risk, such as Chinese tech companies, started to look cheap, while alternative emerging markets such as India have run into trouble.

Local brokerage stocks offer a good bet on this shift. Beijing has started to reform the local listing system. New draft rules suggest listing requirements will ease. Vetting of planned share sales by regulators could soon end. Review periods would shorten and companies would have more leeway to set prices. Daily limits for the first five trading days after listing would end.

The timing is good. Smaller local companies need to raise more funds. As the economy reopens and infections peak, China’s factory activity has bottomed out, with January’s numbers expanding for the first time since September.

Analysts expect brokerage earnings to increase more than a quarter this year, with average daily share turnover expected to rise by a tenth. Yet any optimism is not priced in. The sector index — including more than 50 listed brokerages — has underperformed the broader CSI 300 Index over one year. The largest brokerages, including China International Capital Corp, CSC Financial and Guotai Junan Securities, trade at just around 7 times forward earnings, about a third less than US peers.

A unique characteristic of the Chinese equity market is that local retail investors can be a formidable force. They account for more than 80 per cent of all trading volumes and hold more than Rmb24tn in their trading accounts. Even amid strict lockdowns, depressed sentiment and an economic slowdown, companies raised a record $92bn in proceeds last year.

China’s progress on financial market liberalisation has accelerated in recent years. Investing in the financially strongest brokers offers the best way to benefit.