The dynamics of the Chinese capital market are currently witnessing a seismic shift, driven largely by reform measures aimed at enhancing investment practicesAs the government ramps up counter-cyclical policies and anticipates further liquidity loosening, a wave of optimism sweeps across the marketAnalysts predict that this environment will not only sustain an active capital market but also attract mid- to long-term funds, leading to further institutional and product-oriented developments in the sector.

In 2024, the Shenwan Securities Index is projected to increase by a staggering 29.6%, significantly outperforming the Wind All A Index by approximately 19.6%. The trajectory of the securities sector has roughly been split in two halves over the yearBefore September 24, the market favored blue-chip stocks, resulting in relative underperformance by brokerage firms, albeit with some instances of outperformance during the first quarter

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However, with the announcement of substantial policies on September 24, a renewed wave of confidence surged through the stock market.

The policies disclosed during a news conference by the State Council’s Information Office included interest rate cuts and the establishment of new monetary tools to support the capital market, demonstrating a robust commitment to stimulating investor confidenceFollowing this date, brokerage firms, known for their beta characteristics, witnessed a remarkable rally, significantly outpacing the broader marketThe price-to-book ratios of these firms climbed rapidly, indicating a sharp recovery from about one time to a peak of 1.7 times.

The surge in trading volume and activity has particularly benefited internet brokerage firms like Eastmoney and various fintech stocks

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Prominent securities companies such as CITIC Securities, China Merchants Securities, and Dongxing Securities have emerged as strong performers, buoyed by promising stock selections and M&A themes that have also favored stocks like Tianfeng Securities and Guoxin Securities.

Delving into the profitability of leading brokerage firms, the data reflects a nuanced picture: the collective operating revenue of 43 listed brokerages totaled 371.4 billion yuan in the first three quarters of 2024—a decrease of 2.7% year-on-yearMeanwhile, net profit attributable to shareholders also dipped by 5.9% to 103.4 billion yuanHowever, a notable recovery was observed in the third quarter alone, with revenues climbing to 136.4 billion yuan, marking a 21% annual increase, and net profits leaping 40.8% to 39.5 billion yuan.

With the booming trading climate since late September, coupled with the positive performance in Q4 against relatively low benchmarks, a significant rise in the annual profits of brokerages is expected in 2024. Analyzing the revenue composition reveals that market-driven investment strategies are a primary factor in this growth.

In the first nine months of 2024, brokerages recorded investment income of 131.7 billion yuan, a commendable 28.1% increase year-on-year, driven primarily by favorable bond market trends

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In Q3 alone, the investment revenue soared to 56.7 billion yuan—up an extraordinary 173.7%—accounting for 41.6% of total revenuesAdjusting for operational costs, investment revenues contributed to more than half of the adjusted earnings.

On the contrary, other sectors within brokerages have experienced varying declines; for example, brokerage, asset management, investment banking, and net interest income saw decreases of 13.6%, 2.5%, 38.4%, and 28% respectively in the first three quartersNotably, the asset management segment showed resilience thanks to growth in fixed-income and index products, which mitigated the pressures from declines in actively managed equity products and lowered management fees.

Moreover, the profitability margin of listed brokerages improved, rising from 25.9% in 2023 to 27.9% in the first three quarters of 2024. By excluding those brokerages involved in non-core, low-margin businesses, the profitability could reach as high as 34.5%, indicating growing efficiencies in operations

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Notably, management expenses dropped by 4.7%, with the labor force shrinking slightly, resulting in a reduction in per capita salaries by 8.3%—a reflection of overall operational tightening.

From an asset perspective, the growth in total assets largely stems from increased client margin accounts, with total assets across the listed brokerages rising to 12.6 trillion yuan and net assets to 2.6 trillion yuanThis marks increases of 4.9% and 2.8% respectively compared to the end of the previous yearThe rising client margin accounts, which grew by 28.9%, underpin this positive trajectory, particularly notable among firms like Shenwan Hongyuan and Caotong Securities.

In the broader context, while the annualized growth rate of total assets for listed brokerages averaged 5.8% over three years, this reflects a marked slowdown compared to the pre-2021 stages, where the industry grew by almost 19.6%. The tightening regulations surrounding high-risk instruments have reinforced this cautious approach, curbing the capacity of leading brokerages to leverage their assets

Additionally, demand-driven assets have been eroded in the wake of tighter equity financing regulations, with the sector's leverage ratio remaining stable at around four times.

Looking at the competitive landscape within the brokerage sector, there’s an observable divergence in performance among firmsThe leading brokerages have been capturing a growing share of profits, with the top three, five, and ten firms showing profit growth rates that exceed the overall industry decline of 5.9%. On a longer-term horizon, the concentration of profits has become increasingly apparent—with the top five firms accounting for half of the sector's earnings, a notable rise since 2020.

Furthermore, in the current regulatory climate focused on supporting the more capable while limiting others, leading brokerages possess advantages in emerging business licenses, which optimally positions them for growth in a landscape characterized by stricter regulations

The intent is to nurture a small number of internationally competitive investment banks and institutions by 2035, reinforcing the need for consolidation through mergers and restructuring among these top-performing entities.

As for the overarching implications of policy changes, the recent introduction of the new "National Nine" guidelines emphasizes strict regulation, risk prevention, and the promotion of high-quality developmentThe goals include bolstering the capital market, channeling mid- to long-term funds into investments, and facilitating mergers and acquisitions.

Naturally, these evolving policies reflect a significant transformation in the underlying logic of capital market reforms, shifting the focus from the supply side to the investment sideThis indicates a broader ambition to enhance the quality and investment value of listed companies, improve the fairness of trading mechanisms, and stimulate mid- to long-term capital inflow

It is evidently a radical attempt to reshape the capital market ecology and cement the long-term growth prospects of the securities industry.

The reform agenda has been delineated into three focal areas: enhancing the quality of listed companies through stringent entry standards, improving trading mechanisms, and facilitating the influx of long-term capital into the market.

As the wealth management landscape evolves post-regulatory reforms, securities firms will need to pivot towards a holistic approach—balancing trading activities with an expanding product offering in asset management and mutual fund channelsNotably, wealth management revenue has already taken a hit, contracting by 10.1% year-on-year in the first three quarters of 2024.

Looking ahead to 2025, propelled by accelerated reform efforts and the anticipation of sustained liquidity, the capital market is on track to remain active