Xinhua said while these brokerages are not in as bad shape as China's banks, their situation could worsen in the absence of adequate recapitalization and reforms, which may lead to more instability in the capital markets and undercut the banking reforms.
The industry will have to fix some underlying fundamentals first, including a revision of its business model, according to Xinhua Far East Managing Director Ivan Chung. "I think the business model is a bit problematic … [the brokerages] can only make money when the market goes up because the majority of their income is trading fees," Chung said. While the industry's huge losses have been pinned on poor market conditions and a lack of hedging tools like futures, Chung also cited poor risk management, inadequate compliance and a lack of proper internal control system as culprits.
Meanwhile, Min'an Securities and Wuzhou Securities became the latest brokerages to halt their operations, which have been duly turned over to Guosen Securities and Donghai Securities, respectively. Irregularities were uncovered at the companies, including alleged embezzlement of client funds, state media reported, citing the China Securities Regulatory Commission. Seventeen other problematic securities houses have been closed down or taken over by other financial firms since 2002, in what regulators hope will accelerate market reform.