China may pilot broker licenses for banks

China may grant commercial banks stock broker licenses in a test run of reforms to allow lenders to conduct mixed business, a business insider has told Xinhua.

The State Council, or China's cabinet, is likely to permit several banks to hold securities brokerage licenses directly in an experimental manner at proper time, said the source, who is familiar with the matter but declined to be named.

The source didn't elaborate on the possible timing of the move, but an experimental manner usually means that it will probably happen before laws are changed to formally allow such practice.

It is a common international practice to let some banks try mixed business first and amend laws later, Sinolink Securities said in an earlier report.

The current Law on Commercial Banks prohibits lenders from undertaking trust and broker businesses. A draft amendment to the law was passed by the State Council in June and has yet to be reviewed by the country's top legislature.

There was controversy during the amendment process on whether the restrictions on banks should be removed, but the final draft may set a general direction for licensing them to carry out mixed business, according to the source.

China's Securities Law mandates that securities, banking, trust and insurance should be operated and regulated separately. However, the lines between these businesses have become increasingly blurred in recent years.

The potential income from brokerage increasingly appeals to banks, which are under pressure as interest rate cuts and reforms to liberalize those rates squeezed their profit.

Of 16 commercial banks listed on China's yuan-denominated A-share market, six have already ventured into brokerage, including the country's top four state-owned banks. They made it through buying stakes in or establishing separate subsidiaries with broker licenses.

However, most of those banks are basically limited to broker services in Hong Kong, instead of the mainland stock market.

The country's securities regulator, China Securities Regulatory Commission (CSRC), is working to allow banks to apply to do broker business, though no timetable has been set, CSRC spokesman Zhang Xiaojun said in March.

Some have voiced concerns over regulators' ability to monitor risky behavior once banking and brokerage are managed under the same roof.

These concerns have become more justified after China's stock market saw a boom-bust in the past few weeks, partly caused by wild margin trading, or trading stocks on borrowing.

To avert risks, banks with broker licenses would still have to conduct the business through setting up independent subsidiaries, rather than do it by themselves, Industrial Bank chief economist Lu Zhengwei told Xinhua.