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Xinhua Far East Releases Ratings Report on China Securities Industry

2008-05-08 16:45 1577

CITIC Securities and Guotai Junan Securities Lead in Domestic Firms

SHANGHAI, China, May 8 /Xinhua-PRNewswire/ -- Xinhua Far East China Ratings ("Xinhua Far East") today released the "2007 Credit Profile of China's Securities Industry". Based on in-depth data analysis and industry interviews, the report provides an objective analysis of the current status of China's capital markets, together with a current snapshot of the credit profile, operational environment and risk status of China's securities industry. An overview of the fundamentals of 14 key securities companies is included. The report draws comparisons with foreign markets in offering a number of suggestions for improving the operation of China's capital markets.

Mr. Jae Lie, President of Xinhua Finance said: "In recent years, China's capital market has experienced many changes and reforms amidst its efforts to develop a world-class market. The process is complicated given its relatively young and emerging market. Utilizing international methodology, we have analyzed the Chinese brokerage industry from different perspectives ranging from its present status, future trajectory, and potential risks and opportunities. This report presents Xinhua Finance's thorough view of China's unique market environment while closely tracking it with the international capital markets. We hope this report will help contribute to the promotion and growth of a stable capital market in China. We also believe that this report may be of help to professionals who seek to extend their knowledge of China's capital market."

Dr. Chung Hsing Chen, Vice President of Xinhua Finance and the head of Credit Ratings said: "China's capital markets have experienced a very significant growth over the past two decades, with the overall market gradually maturing despite interim trial and error. The market mechanisms are performing relatively well. Intermediaries and investors are becoming more mature, and a regulatory regime functioning largely satisfactory. Although there remains a great deal of room for improvement, China's capital markets are playing an increasingly important role in the overall economy. We hope this report will facilitate an in-depth understanding of China's capital markets' current status and the major risk factors confronting the Chinese securities industry."

The followings are key findings of the report:

Current status of China capital markets: Dynamic growth, but further improvement needed to achieve efficiency

"Xinhua Far East views China's capital markets as having developed at a rapid pace over the past 30 years. The market size is growing and systems are gradually being updated. Investors are becoming more mature, and a legal system, regulatory framework, and trading rules have basically been established. Although there is a great deal of room for improvement in China's capital markets, they are playing an increasingly important role in the overall economy. Nevertheless, we should bear in mind that China is still an emerging entity and some issues in the market need to be addressed to achieve greater efficiency. Those issues include an unbalanced financing structure, a lagging fixed income market, an insufficient amount of institutional investors, and the need to improve the quality of information disclosure and drive market innovation. The information disclosure framework for China's capital markets has been well established and the quantity and depth of information disclosure of listed companies is adequate, but the actual level of information disclosed is insufficient and the quality needs further improvement. There is no systematic consistency between different types of information. All of the above-mentioned factors have to a certain degree hindered the pace of market development and operational efficiency.

Credit profile of China's securities industry: Overall credit profile is constrained by high volatility in revenue, which can be traced to the development level of the capital markets and a heavy reliance on traditional business

Xinhua Far East notes that, after undergoing comprehensive governance by regulatory bodies since 2004 and the market boom of the last two years, securities companies have seen a significant increase in their capital strength and profitability, and have improved their business practices. However, core competitiveness has not seen material improvement. Limited by the development level of the capital markets, and by strict regulatory control of market access, market operations, business permits and product launchings, securities companies' revenue is highly volatile due to their heavy reliance on traditional businesses. This is one of the primary factors affecting their credit profiles. Moreover, overall capital strength remains weak and concentration in the brokerage business is moderately low. Diversified financing channels and industry integration are necessary to improve capital strength and industry concentration. In addition, their risk management skills and abilities are in the early stages of development, corporate governance requires further improvement, and further progress is required in information disclosure to the public.

Further development of China's capital markets & securities industry: contributing factors and policy recommendations

Transformation and development of China's securities industry, and enhancement of its credit profile, will depend on continuous improvement of China's capital markets and gradual market deregulation. Xinhua Far East anticipates that macroeconomic operation trends, transformation of financial institution business models, continuous improvement of the regulatory environment, development of multi-layer capital markets, increasing importance of institutional investors, improvement of market information disclosure, and quickening of the opening of the markets will all fundamentally influence development of the capital markets.

Among these changes, the trend towards mixed financial services companies will provide securities companies with new sources of revenue, and bring significant changes to their business models and the competitive landscape. At the same time, mixed financial services will introduce tremendous business and regulation risks. Hence future financial holding companies / universal banks will have a profound impact on China's financial markets and competitive landscape. However, currently China's various financial firms are still in the growth stage. Domestic financial institutions such as banks, securities firms, and insurance companies are still not capable of operating as financial holding companies, given their limited capabilities in terms of expertise, talent pool, and risk management. On a related front, due to limited existing regulatory capacity and the uncertain impact on the financial industry of a suddenly unified supervisory framework, great care should be taken in exploring integration of the regulatory bodies. Xinhua Far East believes that the temporarily shelved decision of the central government regarding unified supervision would be beneficial in mitigating the risks faced by the securities industry, and that currently a more efficient regulatory coordination system is of great necessity for the financial markets.

The principles of government regulation should be favourable to fair competition in the marketplace. In order to promote fair competition in the market, the government should relax stringent approval requirements for traditional business and normal projects. Xinhua Far East endorses speeding up the development of multi-layered capital markets. However, Xinhua Far East sees the main boards as vital to the development of China's economy and thus of special importance in the development of the overall capital markets. Hence in the development of multi-layered capital markets priority should be assigned to strengthening reforms and improvement of the main boards. This at a minimum will include further diversification of SOE stock ownership, strengthening of corporate governance, and encouraging private foreign enterprises to list in the A share markets.

In addition, we recommend accelerated development of the bond markets and the encouragement of securities firms to undertake a bigger role in these markets. Despite rapid development of China's bond markets, problems such as market segmentation and multiple regulatory bodies still exist. Risk pricing and credit ratings have yet to be adopted by the markets, impeding development of the bond markets to a certain degree. In developed countries the bond market business supplies a very large portion of securities firms' revenue, but in China, the corporate bond market is unlikely to contribute much to securities firms' revenue over the short term. Given their particular risk appetites, securities firms could play a larger role in the bond markets. By undertaking services such as underwriting and market making, securities firms could bring increased scale and liquidity to the bond markets while at the same time building a new profit growth engine for themselves.

Business lines: Competitive landscape and future prospects

Currently securities companies' brokerage business revenue relies heavily on commissions and spreads derived from trading channel services, while revenue from wealth management and advisory services is miniscule. The market structure is dispersed and competition is in a primary stage. In the current environment, a transformation from offering trading channel services to offering full-scale and accurate investment consultancy services will depend to a great extent on external institutional changes and will not be easy to accomplish within a short timeframe.

The securities companies' investment banking business is characterized by high concentration, market segmentation, and fierce competition. Its major sources of revenue arise from the traditional services of initial underwriting and additional issuance, with financial consulting and other businesses contributing relatively little. Future expansion of the main boards, launch of the Growth Enterprise Market (GEM), and diversification of refinancing channels will bring new development opportunities to the underwriting business. Reform of the new stock issuance system will have a major impact on the investment banking business. It will affect not only the pace of initial public offerings, but also the efficiency and cost of underwriting, risk awareness of markets, investment psychology, etc. Additional factors with a significant future impact on the investment banking business competitive landscape and development will be M&A business development, universal banking, securities companies' marketing channels, competition from foreign peers, etc.

Fundamental analysis of key securities firms: CITIC and Guotai Junan have relatively balanced business lines and the strongest capital bases

The report provides an analysis of the credit profiles and fundamental information for 14 key securities firms. These were the top 12 firms in operating revenues in 2007 (except for newly reorganized China Galaxy Securities) together with companies including Ping'an Securities and BOCI, which hold the lead positions in such areas as SME investment banking and underwriting.

CITIC Securities: CITIC Securities is the leading securities company in the China market. After two years of improvement in the equity markets and continuous company expansion, its net capital has increased significantly, its revenue sources have been diversified, and its risk bearing capacity has strengthened. CITIC Securities has financial holding companies as large stockholders, and industry leading research capabilities, which together provide a strong platform for the company's various businesses and future development. However, the company's credit profile is constrained by a continued heavy reliance on traditional businesses, and likely increased pressure from international investment banks on its market share in the

high-end of the investment banking business, as China's securities business continues to open up.

Guotai Junan Securities: Guotai Junan is one of the leading domestic

full-service securities firms, maintaining a competitive position through a balanced strategy and leading positions in brokerage, as well as its expertise accumulation and innovative capacity. However, increasing industry competition from rapidly growing peers poses challenges to maintenance of its market position. Internally, the company needs to improve corporate governance, modify its incentive schemes, and increase its competitiveness in several business lines.

For more information on the credit profiles of key securities companies, or to read the full report, please contact us at: xfe@xinhuafinance.com

Note to Editors:

About Xinhua Far East China Ratings

Xinhua Far East China Ratings (Xinhua Far East) is a pioneering venture in China that aims to rank credit risks among corporations in China. It is a strategic alliance between Xinhua Finance (TSE Mothers: 9399), and Shanghai Far East Credit Rating Co., Ltd. Shanghai Far East became a Xinhua Finance partner company in 2003 and the first China member of The Association of Credit Rating Agencies in Asia in December 2003.

Capitalizing on the synergy between Xinhua Finance and Shanghai Far East, Xinhua Far East's rating methodology and process blend unique local market knowledge with international rating standards. Xinhua Far East is committed to provide investors with independent, objective, timely and forward-looking credit opinions on Chinese companies. It aims to help investors differentiate the credit risks among the corporations in China, thereby, cultivating their awareness and promoting information disclosure and transparency in the China market. For more information, see http://www.xfn.com/creditrating.

About Xinhua Finance Limited

Xinhua Finance Limited ("XFL") is China's premier financial information and media service provider and is listed on the Mothers Board of the Tokyo Stock Exchange (symbol: 9399) (OTC ADRs: XHFNY). Bridging China's financial markets and the world, Xinhua Finance's proprietary content platform, comprising Indices, Ratings, Financial News, and Investor Relations, serves financial institutions, corporations and re-distributors worldwide. Through its subsidiary Xinhua Finance Media Limited (NASDAQ: XFML), XFL leverages its content across multiple distribution channels in China including television, radio, newspaper, magazine and outdoor media. Founded in November 1999, XFL is headquartered in Shanghai, with offices and news bureaus spanning 11 countries worldwide. http://www.xinhuafinance.com

For more information, please contact:

Hong Kong

Ms. Joy Tsang

Tel: +86-21-6113-5999

+852-948-64363

Email: joy.tsang@xinhuafinance.com

China

Mr. Scott Zhang

Tel: +86-21-6113-5996

Email: scott.zhang@xinhuafinance.com

Source: Xinhua Far East China Ratings
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