In recent months, a significant shift in the policy landscape has emerged, aimed at invigorating China's capital markets and encouraging household investment. This new direction seeks to enhance residents’ participation in the stock market by reforming fees associated with public mutual funds and promoting passive index funds. Such reforms are critical not only for opening channels for social security, insurance, and wealth management funds to enter the market but also for bolstering the overall equity holdings of residents. As confidence in the capital markets gradually rebuilds, the securities industry appears to be entering a robust growth phase.

The backdrop of these developments includes key monetary policy tools being directly targeted at capital markets, characterized by fiscal expansion, central bank balance sheet growth, and liquidity easing. The recent policy amendments, particularly the release of "New National Guidelines", provide guidance for the direction of market expectations. Concurrently, the reform of mutual fund fees plays a pivotal role in channeling investment through passive index funds and alleviating obstacles faced by institutional funds.

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Since late September 2024, a surge in retail investment, stimulating both new openings and the reactivation of dormant accounts, has led to heightened trading volumes and an increase in margin financing scales. Various segments within the brokerage sector are witnessing positive adjustments as a result. Factors such as the shifting of residential deposits, ongoing interest rate cuts, and progressive fiscal stimulus suggest that this upturn in the securities sector could be sustainable in the foreseeable future.

Despite a rocky first three quarters in 2024, brokerage firms displayed a glimmer of hope with their performances improving quarter-on-quarter, indicating resilience amidst the overarching pressures of the market. Although year-over-year figures reveal a decline in operating revenues and net profits for the listed brokerages, a significant shift has been observed in the third quarter. The companies collectively recorded impressive revenue figures reaching approximately CNY 111 billion with a sequential increase of around 6.8%, paired with net profits soaring by about 13% to approximately CNY 41.47 billion.

An analysis of the revenue mix reveals that brokerage services composed about 18.6% of total revenues, while investment returns contributed a staggering 51.8%. This shift underscores the rising importance of investment gains, further influenced by favorable market conditions. Additionally, an examination of assets indicates that the overall asset scale has resumed growth, supported mainly by the increase in clients' margin deposits, which surged by CNY 57.68 billion by the end of the third quarter.

On the liabilities side, brokers experienced growth primarily due to an increase in securities trading funds. By the end of the recent quarter, total liabilities were reported to be CNY 10.2 trillion. The influx of margin trading indicates a healthy appetite for leveraged investments among retail investors, as evidenced by the ongoing expansion of both the brokers' asset bases and their capacity to facilitate trading.

Despite these encouraging trends, the initial public offering (IPO) landscape remains constrained, with no new licensed securities firms entering the market in 2024. The overall scale of equity refinancing has also diminished significantly compared to previous years, signaling a cautious approach from firms amid regulatory scrutiny.

In terms of refinancing plans, the majority of announced initiatives since the start of 2024 have focused on mergers and acquisitions rather than purely on financial augmentation. For instance, Guolian Securities recently raised roughly CNY 29.5 billion to acquire Minsheng Securities, marking one of the largest refinancing moves in this space. Similar transactions, including Guotai Junan’s acquisition of Haitong Securities, reflect a strategic pivot toward strengthening market positions through consolidation.

Regulatory encouragement for mergers and acquisitions continues to drive consolidation in the sector. This merging wave demonstrates multiple benefits, such as enhancing pricing power for major firms while mitigating systemic risks associated with smaller entities experiencing liquidity troubles. As the securities industry forms a cornerstone for new types of financing, the integration of resources will likely lead to enhanced operational efficiencies and expansion of service capacities.

One of the vital areas for profitability enhancement is to extend the monetizable value of different business licenses. The growth in new accounts reflects an increasing investor interest - in September alone, the Shanghai Stock Exchange reported a record increase in new accounts by approximately 6.85 million, marking a staggering year-on-year growth rate of 484%. This influx can be further dissected by examining the flow of funds into the market, which saw a net influx of CNY 307.6 billion from small and medium investors.

As brokerages grapple with rising competition for client acquisition, particularly against stronger financial platforms, the necessity of maximizing client management capabilities and enhancing the value of wealth management services comes to the forefront. The transition toward sophisticated advisory services, especially in wealth management and margin financing, becomes pivotal in optimizing client retention and maximizing revenue potential.

In light of a remarkable surge in investor participation, brokers are posed with the challenge of effectively managing and servicing this expanding client base. Innovative product solutions are essential, with a keen focus on cross-utilizing asset management licenses to enhance monetization within their business models. The emphasis on the development of buy-side advisory services is now becoming a central focus as firms adapt to cater to evolving client expectations and market demands.

With margin trading being one of the significant growth drivers for brokers, the size of margin accounts has approached CNY 1.84 trillion, reflecting increased investor engagement in the market. Based on conservative estimates, a potential annual net interest income of CNY 12 billion could be generated from this expansion, showcasing a crucial revenue avenue for brokers moving forward.

Brokerages such as Dongfang Caifu have successfully capitalized on the monetary value of their financial licenses. Since acquiring a securities license in 2015, their securities-related income streams have become pivotal to their financial health. The diversification into brokerage services and the continued development in fund distribution show the potential for enhanced client profitability.

In the underwriting space, the pressure on equity underwriting remains palpable, although there exists potential in the mergers and acquisitions sphere. Since 2024, policy frameworks surrounding acquisitions have shifted towards a more supportive stance, promising to foster corporate integration and resource sharing.

Given the current lenient regulatory backdrop, sectors exhibiting strong merger intentions include companies attempting re-approvals post-IPO, industries seeking structural synergies, and local governments looking to leverage stock platforms for asset infusions. The fiscal dynamics combined with relaxed restrictions create a fertile ground for mergers and acquisitions to flourish.

Analyzing the funding landscapes over the first ten months of 2024, there is a noticeable downturn in initial public offerings, with a total financing volume amounting to CNY 52.8 billion – a decline of 84.1% year-over-year. The equity refinancing activities have plunged nearly 72%, reflecting a broader trend of conservatism in capital fundraising strategies.

On the proprietary trading front, the growth in investment assets has led to improved returns sequentially. Brokerages have strategically focused on diversifying their investments, moving towards more favorable asset allocations that align with market trends. This shift has been mirrored in robust returns on investments, where in the most recent quarter, brokerages reported investment incomes of about CNY 57.4 billion – a remarkable high.

When examining asset management services, the private mutual fund sector continues to expand, while public offerings trend towards active management styles. By mid-2024, the net asset value of private mutual funds peaked at around CNY 6.42 trillion, confirming sustained growth in this segment, primarily drawn from institutional investors.

With the asset mix predominantly focused on bond products, the public mutual fund sector's diversity remains markedly low in comparison to traditional mutual fund arenas. This suggests positioning challenges and underscores a critical need for innovation in public offerings.

The burgeoning market for over-the-counter derivatives has established itself as a breakthrough avenue for traditional business models. In the Structural Assessment Committee (SAC) framework, OTC derivatives witness contracts formed outside standard exchange environments, allowing brokerages to benefit from tailored hedging strategies while retaining flexibility.

Recent data indicates that leading brokerages have significantly bolstered their stock holdings—nearing 90% for companies like CICC—highlighting their strategic reliance on enhanced hedging capabilities through significant OTC dealings. The size of OTC derivative ventures remains robust; however, regulatory constraints implemented since mid-2021 curbed further expansion in this arena.

Going forward, the landscape for OTC derivatives remains promising despite headwinds surrounding brokerage expansion. Comparative assessments against global markets, particularly the US, reveal that there exists substantial potential for growth in China's OTC derivatives compared to their on-exchange counterparts. In the medium term, regulatory pressures, along with inherent market deficiencies, may challenge the pace of expansion.