This report does not constitute a rating action.
China's securities firms have greater exposure to market risk. Over the past year, many have rapidly increased investments in equity instruments held for non-trading purposes. Since these positions are often unhedged, firms will become more susceptible to market volatility. But S&P Global Ratings notes this risk is still limited for rated issuers. This is despite significant volatility in equity and other markets in reaction to U.S. trade and other policy actions.
What's Happening
China's securities firms have increased their holdings of "other equity investments", which include stocks held under a high-dividend yield strategy, and stocks acquired using funds from China's swap facility. Such investments also include hybrid securities, such as perpetual bonds with loss-absorbing capacity issued by commercial banks.
Despite their increased exposure, our rated issuers generally have stable leverage despite volatile market conditions.
Why It Matters
Unhedged exposure increases market risks. Investments booked under "other equity investments" are less likely to be hedged, in our view, due to the nature of the investment strategies and limited availability of hedging tools.
The total fair value of investments booked under other equity investments for rated securities firms more than doubled year over year in 2024, albeit from a low base. The nominal increase in these assets accounted for 25% of the expansion in total assets during the year.
As of Dec. 31, 2024, other equity investments accounted for about 4.0% of the total assets of rated Chinese securities firms, up from 2.0% as of Dec. 31, 2023. The firms with the highest ratios are Shenwan Hongyuan Group (10%), China Galaxy Securities (7.6%), and Citic Securities (5.3%).
Market risks are rising. The reported value at risk (VaR) for instruments sensitive to stock price movements increased by 28%-101% year on year by end-2024 for the six securities firms we rate that disclose such information. This indicates a general increase in market risks associated with their equity portfolios. These firms accounted for 43% of industry total assets as of end-2024.
We believe the VaR framework at these securities firms may not fully capture the higher inherent risks associated with loss-absorbing capital securities issued by commercial banks. That's due to the securities' subordinated nature and features such as permanent principal write-down, contingent conversion into common equity, or coupon deferral.
Leverage adjusted for client assets remains largely stable. Other significant growth drivers were cash held on behalf of customers and margin accounts, buoyed by a recovery in stock market sentiment since September 2024. Together, they accounted for about 70% of the expansion in total assets in 2024. Excluding customer assets, the leverage for rated securities firms slightly declined to 4.34x from 4.41x at end-2023. This came alongside a 6% year-on-year growth in total equity.
What Comes Next
Despite the strong growth in equity investments in 2024, these holdings are still a small part of securities firms' total exposure. That means there's only a limited impact on our assessment of the firms' capitalization and overall credit profiles.
However, the firms' preference for yield-seeking strategies and their participation in China's swap facility program could increase their unhedged exposure as stock market sentiment improves. Continuous strong growth could therefore undermine our assessment of the capital strength of the securities companies. Any material unanticipated lapse in market or operational risk controls amid volatile markets could also affect our ratings on these companies.
Related Research
- China Brokerages: More Mergers, Still Fragmented, March 13, 2025
- China Brief: Securities Firms Await Revival In Market Sentiment, Jan. 27, 2025
- Shenwan Hongyuan Securities, Shenwan Hongyuan (H.K.) Ratings Affirmed On Very Strong Capital Buffers; Outlook Stable, Nov. 20, 2024
- Brokerage Brief: China's New Swap Program Will Likely Squeeze Capital Ratios, Oct. 23, 2024
| Primary Contact: | Yiran Zhong, Hong Kong 25333582; yiran.zhong@spglobal.com |
| Secondary Contacts: | Ryan Tsang, CFA, Hong Kong 852-2533-3532; ryan.tsang@spglobal.com |
| Xi Cheng, Shanghai 852-2533-3582; xi.cheng@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.