A Chinese First: Brokerage Goes Bankrupt

By Maria Trombly | Securities Industry News | January 30, 2006

As China's secondary financial center, the southern city of Shenzhen has helped to lead the country's fitful drive toward free markets. Last week it blazed a different, though still pioneering, trail as the location of the first bankruptcy in the Chinese brokerage sector.

The declaration, by the Shenzhen Intermediate People's Court in the case of Dapeng Securities (also known as China Eagle Securities), was a long time coming. China's securities industry has been plagued by mismanagement and financial losses, and the country's lack of a workable bankruptcy system--the government has had to either bail out firms or order them closed--has prevented broad-based reforms and hindered financial-market modernization.

The country's low level of investor confidence has been exacerbated by the fact that out of about 130 securities firms, 63 are reportedly having problems, and 20 have been placed under special monitoring. According to the official China Daily newspaper, 21 firms have reported losing an aggregate 1.2 billion yuan ($148 million) in 2005, the fourth consecutive year of heavy losses.

Meanwhile, the Chinese government has been making progress in imposing risk controls on securities firms and has begun a lengthy process of selling off its majority stakes in listed companies.

Press reports say Dapeng was unable to cover its $333 million in debts. The bankruptcy action came a year after the company was barred from doing business when its embezzlement of $99 million worth of customer funds came to light. The government then turned the brokerage over to Changjiang Securities, a joint venture partly owned by France's BNP Paribas. But the mess proved too difficult to clean up.

The Dapeng case promises to set an example for the future and serve as a model for bankruptcy laws in development. Jun Li, deputy president of Daiwa SMBC-SSC Securities Co., a joint venture of Shanghai Securities and Japan's Daiwa Securities SMBC, said: "The bankruptcy is a step in restructuring the securities industry. It's necessary for our securities industry to change its way of doing business."