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China will launch measures to assess the capability of securities firms to carry out stock trading, a move aimed at ridding the industry of poor securities companies.

 

The new assessment system, named the net capital measurement, hopes to weed out firms with poor liquidity. It is a better way to measure a company's finance strength.

 

According to the China Securities Regulatory Commission (CSRC), under the new measurement a firm will have to give up stock trading if its net capital does not meet certain requirements.

 

Net capital is a popular measurement to assess a brokerage's strength. It measures a firm's net worth, minus deductions taken for any assets that might not easily be converted into cash at their full value.

 

The CSRC is introducing the international standard as part of its efforts to bring domestic players more in line with global norms.

 

According to the CSRC, securities firms will now have to submit monthly reports on their net capital and risk-controls.

 

The CSRC is to require securities firms to tighten their risk controls by providing detailed financial data to the regulator.

 

Under the new rules, securities firms will have to limit the size of propriety trading to two times their net capital. In addition, holdings in a single equity should not exceed 5 percent of the stock's total worth.

 

Asset management business should be kept within 30 times a firm's net capital and the size of underwriting one securities product should be no more than 80 percent of net capital.

 

Securities companies will be required to report and make explanations to the regulator should they fail to meet the criteria, the regulator said.

 

The CSRC has posted the above draft rule on its website. The public will be able to comment on the rules from tomorrow to January 23, according to the regulator.

 

Analysts say that under such a financial pressure, securities firms will either quit trading or seek mergers to consolidate their strengths.

 

Dong Chen, an analyst from Citic Securities, said dozens of securities firms might not meet the new requirements. Those firms must either find new investors to increase their overall capital or find new partners to combine their strengths.

 

China's general survey on the country's securities industry reported that the country's 465 securities companies suffered an aggregate loss of 19.2 billion yuan (US$2.4 billion) in 2004.

 

Bloomberg reported that China's Shenzhen and Shanghai stock markets have had about half of their market value wiped out since indexes rose to record levels in 2001, prompting investors to retreat from buying equities and causing shrinking revenue at securities companies.

 

It also reported that the Shanghai Composite Index dropped 6 percent last year in dollar terms and the Shenzhen Composite Index declined 9.5 percent, making them the fourth and third-worst performers in 2005 of the 78 global equity markets.

 

The government has speeded up its supervision of the country's securities firms, aiming to end the five-year-long slump in the industry.

 

The regulator has taken over or shut down 19 securities firms over the past three years because of irregularities, such as misappropriation of clients' funds, illegal acquisition and mismanagement. Recently closed securities firms, such as Northwest Securities and Xing An Securities, all had poor internal controls on their finance.

 

The tightened measurement on securities firms' finance shows China's continuing efforts to remove bad players and increase support for better performing firms.

 

(China Daily January 10, 2006)