On November 26, a notable surge was observed in Chinese brokerage stocks, with Jinlong Co., Ltd. hitting the upper limit of its trading rangeProminent players in the industry such as Everbright Securities, Huachuang Securities, CITIC Jiantou, First Capital Securities, Nanjing Securities, China Galaxy Securities, Pacific Securities, and CITIC Securities also followed suit, demonstrating a robust positive movement across the sector.

In hindsight, 2024 is poised to be a pivotal year for the Chinese securities industry, representing an unprecedented watershed momentWhile the brokerage segment has shown significant gains over recent months, these advancements merely scratch the surface of the industry’s true potential and anticipated growth.

Historically, the catalysts for reversals in brokerage firms are rooted in expectations surrounding supportive policies for the capital markets and the securities sector, typically arising during periods of market underperformanceThe continuity of sectoral uptrends hinges on a positive feedback loop characterized by policy influence on the market, which in turn drives performance outcomes.

Looking to the past, key developments such as the collective appearance of top financial officials on September 24 and subsequent high-level decision-making gatherings on September 26 were pivotal in signaling the dawn of a new reversal phaseFollowing these policy directives, market sentiment in China was radically transformedTrading volumes in A-shares surged, eclipsing the trillion yuan mark and maintaining that level into the near futureNoteworthy records were set on September 30 and October 8, with transaction volumes surpassing 2.6 trillion yuan and 3.4 trillion yuan respectively.

With market activity on the rise, the performance of brokerage firms saw immediate improvementData indicates that among 43 listed brokerages, over 30 companies recorded an increase in net profit during the third quarter

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For instance, CITIC Securities reported a net profit attributable to shareholders of 6.229 billion yuan in Q3, representing a year-on-year increase of 21.94%. Meanwhile, Huatai Securities achieved a staggering 137.98% year-on-year growth, translating to a net profit of 7.211 billion yuanOther major firms, including Guotai Junan and China Galaxy, also enjoyed notable increases in profitability, with year-on-year growth rates of 56.17% and 54.79% respectively.

Notably, smaller brokerage firms showcased even greater elasticity in their performance metrics compared to their more established counterpartsNortheast Securities, for example, reported a net profit surge exceeding tenfold, while Guohai Securities and First Capital Securities' net profit growth soared close to twenty times.

Clearly, the transaction logic of policy leading to market performance and subsequently to financial outcomes has been establishedProvided that the market continues to thrive, brokerages are certain to follow suit, a scenario that has become increasingly entrenched.

During a recent press conference hosted by the State Council Information Office, the central bank made a significant announcement regarding the establishment of targeted relending tools to facilitate stock repurchases by publicly listed companies and capital increases by major shareholders, with an initial provision of 300 billion yuanAlongside this, the central bank will introduce swap facilities for brokerage firms, mutual funds, and insurance companies that qualify, allowing these entities to leverage their holdings of securities like stock ETFs as collateral for liquidityThe first swap facility will facilitate operations up to 500 billion yuan.

According to Pan Gongsheng, the governor of the central bank, if the outcomes are favorable, additional provisions of 300 billion yuan and 500 billion yuan could follow, suggesting a potential influx of up to 2.4 trillion yuan into the market

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Significantly, this capital has yet to be deployed, meaning any future market entry will likely exert fresh upward pressure.

Moreover, following the announcement of increased policies in the monetary finance sector on September 24, the consensus was that further adjustments in fiscal policy would follow after reviewing the effectiveness of the "924 Financial Policy." Contrarily, actions surpassed expectations, with statements on fiscal policy intensifying just two days laterCurrently, a debt resolution plan is already in motion, and the upcoming Central Economic Work Conference in December is anticipated to unveil further high-impact insights.

The implementation of fiscal measures will fundamentally enhance the profitability baseline across the entire market, serving as the true engine behind the impending bullish trends.

From a broader perspective, the present-day securities industry stands at the cusp of an extraordinary historical opportunityIn the past, China's emphasis was on rapid industrialization and urbanization, primarily propelled by infrastructure and real estate to drive economic growth, with household savings and bank credit serving as optimal resource allocation mechanisms orchestrated by the governmentNow, China is in the era where technological innovation leads growth, underscoring the need for breakthrough advancementsThis shift necessitates businesses to undertake risks and experiment extensively, leading to a decisive pivot toward direct financing via capital markets, supplanting the previously dominant role of commercial bank-mediated indirect financing.

Examining the investment landscape, between 2020 and January 2024, household deposits in China surged by 58.24 trillion yuan, 82% of which comprised time depositsThis surge in deposits over four years is nearly equivalent to the total deposited during the previous decade from 2009 to 2019. Post real estate era, the stock market has matured into a new reservoir for monetary storage, where Chinese residents possess a disproportionately low allocation of financial assets compared to developed nations, signifying a pronounced readiness to diversify into equities

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A striking statistic from October shows a single-month reduction of 570 billion yuan in household deposits, contrasted by an increase of 1.08 trillion yuan in deposits held by non-banking financial institutions.

Both sides of capital investment are calling for a robust capital market, which explains the high-level government initiative to revitalize the stock market and the unprecedented push towards establishing a financially robust nationAchieving this objective necessitates a correspondingly strong securities industry as foundational support.

From an international perspective, the total assets of the U.S. securities industry account for 15%-30% of its GDP, whereas China's figure lingers between 3%-6%, a stark inconsistency given its status as the world’s second-largest economy.

In March 2024, the emphasis was on accelerating the development of top-tier investment banks and institutions, enlisting support for leading brokerages through business innovations, group operations, and mergers and acquisitions as strategies for strengthening their statureSoon after, firms such as Zheshang Securities, Guolian Securities, Guosen Securities, Guotai Junan, and Haitong Securities disclosed plans related to mergers or acquisitions.

Historically, mergers and acquisitions have proven to be the most efficient means for financial firms to achieve rapid expansion, as the accompanying synergies and economies of scale allow entities to ascend to new heights in short durationsBetween 1995-2022, 2004-2006, 2008-2010, and 2012-2020, China experienced four distinct surges of mergers and acquisitions in its securities sector, which is currently undergoing its fifth wave.

Strikingly, whether spurred by a bullish capital market or the independent fortification of brokerages, both scenarios invariably lead to reevaluations of brokerage valuations — a pattern consistently reinforced by history.

Additionally, it is crucial to highlight that across the major market trends in the A-share landscape over the past two decades, brokerage stocks have consistently delivered excess returns — a consistent trend with no exceptions.

China finds itself at an unprecedented juncture where the necessity for a strong capital market and securities industry is acute

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