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Dec.17 - China's stock regulator is studying a plan to let brokers2 set up private equity3 funds to invest in non-listed companies as part of moves to help them add new channels of growth, industry sources said yesterday.
The pilot scheme, set to debut4 early next year, will likely be tested in a small number of stable and financially healthy brokerages to curb5 operational risks, the sources said. "Engaging securities firms in private equity businesses will certainly diversify6 their sources of revenue," said a Shanghai-based source familiar with the matter. "That's what authorities are studying and (the plan) might be pushed forward in the first half of next year." China's more than 100 brokers, long plagued by scandals and weak risk controls, are striving to expand and boost their bottom lines as there are plans to reduce the number of brokerages by half by next August. More than two-thirds of their revenues now come from commission fees for trading securities for clients, leaving operations vulnerable during times when the stock market is bearish7. To bolster8 brokers' business scope, the started last year to permit "first-tier", or the 10 or so biggest, brokers to pool retail9 investors10' capital and help them invest in the capital market. But sources said acquiring ownership stakes in non-public firms is the business that most brokerage houses are eying as it might bring a hefty profit. "The gains from private equity operations will be eye-popping," said a second industry source with knowledge of the situation, "But risks are also higher, so regulators want to ensure only strong players can test the water." The sources noted11 specific regulatory arrangements for the scheme have yet to be finalized12 and no broker1 has gained approval for a trial so far. "Regulators are collecting proposals from brokers with an aim to draft the rules better," said the first source. "It may take months to do so in order to minimize risks." The sources said regulators may let brokers manage private equity on their own or they have to set up subsidiaries before they can start the business.
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