CITIC Securities Juggles Its Golden Eggs

Shares in one of China's largest brokers CITIC Securities slid January 15 on news that the firm would sell a key stake in its profitable offshoot China Securities Co. Ltd.

That same evening, CITIC Securities took another hit with news that the China Securities Regulatory Commission (CSRC) had suspended new product applications, effective January 1, for its wholly owned subsidiary China Asset Management Co. Ltd. (ChinaAMC), the nation's largest fund manager.

The suspension was ordered after CITIC Securities failed to meet a deadline for selling its ChinaAMC shares.

CITIC Securities' bad day reflected not only financial travails but also troubles for small shareholders and challenges for brokerage to pull away from government dependency.

Nevertheless, key aspects of CITIC Securities' plans for China Securities and ChinaAMC appear to remain on track. And the firm's largest shareholder, CITIC Group, stands a good chance of benefiting. Indeed, a source close to CITIC Securities compared China Securities and ChinaAMC to "geese that lay golden eggs."

Two-Phase Deal
 
CITIC Securities was motivated to sell a China Securities stake by a regulatory restriction barring any organization or controlling party from holding shares in more than two securities firms, or holding a controlling stake in more than one.

CSRC clarified the restriction in March 2008, giving securities firms that failed to meet its standards until the end of 2009 to submit readjustment plans and then complete all restructuring by December 31, 2010. An exception was granted to Central Huijin Investment Co. Ltd., which received a three-year amnesty.

Meeting the first deadline proved difficult for CITIC Securities, which held significant stakes in three brokers at the time of CSRC's decision. Those stakes are now 100 percent control of Kington Securities Co. Ltd., a 91.4 percent share in CITIC Wantong Securities Co. Ltd., and 60 percent of China Securities.

As part of a two-phase plan for selling the China Securities stake, CITIC Securities planned to first sell 45 percent of its China Securities stake to the city government's Beijing State-Owned Assets Management Co. Ltd. (BSAM) for between 7 and 8 billion yuan. In the second phase, China Securities' other shareholder China Investment Corp. (CIC) would sell its 40 percent stake to CITIC Group.

CITIC Group controls more than 20 percent of CITIC Securities. So by selling China Securities shares to BSAM through Citic Securities and buying CIC's stake directly, CITIC Group would get to keep this gold-egg laying goose. At least, that's the way it's supposed to work.

"The change in China Securities' ownership has been common knowledge for quite some time," said an inside source. "Even though the order has not yet been given to get rid of the CITIC Securities logo on business cards, new cards have been printed. And China Securities' new company calendars replaced the CITIC Securities logo with the logo for CITIC Group."