Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China's always been the contrarian bet. When the global financial crisis hit, the economy boomed; now that the U.S. is on the up, it's all doom and gloom.

So too with banking. While Western banks were being bailed out and concentrating on raising capital, China's went on a lending spree. Now, the country is moving to let its banks bulk up, just as those in the U.S. are coming under pressure to break up and the U.K. forces lenders to ring-fence retail from investment banking. In March last year, the China Securities Regulatory Commission said it was considering issuing brokerage licenses to commercial banks. While there have been been no rules issued since, an increasing number of banks are making noises about getting into the business.

In announcing its 2015 earnings earlier this month, Citic Securities said that banks gaining brokerage licenses ``will inevitably have a material impact on securities companies.'' A lender that could not only underwrite deals, but also sell stocks and bonds through its branches, could wipe out many brokers. ICBC, China's largest bank, has more than 17,000 branches; Citic Securities, the biggest brokerage, 299.

Lenders, desperate to find gains while they write off bad loans and adjust to what Bank of China President Chen Siqing called a ``new normal'' of sub-10 percent growth, are taking note. Bank of China was the first commercial lender with a domestic brokerage arm, according to Bloomberg Intelligence. Bank of Communications won approval in July to buy Royal Bank of Scotland Group's one-third stake in Hua Ying Securities, while Industrial Bank plans to acquire Huafu Securities, people familiar said last year. (China Merchants Bank and ICBC have sister-company securities firms that are under the same state-owned parent, but the units operate separately.)

After last year's boom and bust, China's stock market has begun a slow revival. Still, stock prices and turnover remain well below last year's peaks. 

Lackluster Trade
Volumes traded on China's stock exchanges are about a third of their high on June 30 last year
Source: Bloomberg

Brokerages are not just heavily dependent on trading, which makes up more than 80 percent of their revenue: As in the U.S., they're also facing declines in trading commissions. These fell to 5.1 basis points last year, from 6.9 basis points in 2014,  according to BI analyst Francis Chan.

Lending remains the big business driver for Chinese banks. Non-interest income is 24 percent of the total, compared with more than half at many U.S. banks. Moves to increase fee or commission income through selling wealth management products have brought lenders into the arena of shadow banking, itself fraught with default risks. In the past year, Beijing also did away with banks' biggest cash cow -- rules that put a floor on lending rates and a ceiling on deposit rates. Unwritten rules remain that have forestalled all-out competition, but at some point deregulated interest rates will start to hurt.

Whatever their problems (which also include a spate of corruption-related arrests and last year's enforced stock market-support operation), Chinese brokerages still enjoy higher valuations than lenders. Shares of publicly traded brokers are trading at an average of 3.5 times book value, compared with less than 1 for banks, according to data compiled buy Bloomberg.

For now, Chinese brokerages can rest easy: It's early days. There's little clarity on whether banks will be allowed to use their thousands of branches to sell stocks and bonds. A first step, of allowing them to get into underwriting share sales, is sure to come sooner.

Rising Risk
Non-performing loan ratios at China's big five banks have been surging (%)
Sources: Company data, Morgan Stanley Research
China's big five banks are Industrial & Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, and Bank of Communications

Since the financial crisis, the U.S. has faced calls to reinstate Glass-Steagall, the Depression-era law that separated commercial and investment banking. China's experience of universal banking may be a more positive one. For one thing, the biggest banks are already state-controlled and have such huge loan books that bailouts are inevitable in the event of distress. Since they are already too big to fail, there may be little risk in letting them get even larger -- provided that improves profitability. China's brokerages may worry about encroachment, but letting banks into the securities business could be one way to ease the burden of dealing with the country's bad-debt morass.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Matthew Brooker at