China’s Biggest Securities Brokerage Stumbles in Global Push

(Bloomberg) — Citic Securities Co.’s dream of going toe-to-toe with Wall Street’s powerhouses in global finance is fizzling over troubles at its once free-wheeling Hong Kong operations. 

(Bloomberg) — Citic Securities Co.’s dream of going toe-to-toe with Wall Street’s powerhouses in global finance is fizzling over troubles at its once free-wheeling Hong Kong operations. 

CLSA, acquired by Citic a decade ago to spearhead the Chinese broker’s international expansion, has seen more than 750 employees, or about a third of the staff, quit since 2021 after increasing clashes between its Beijing and Hong Kong workers, cuts in pay and budgets as well as management issues, said people familiar with the matter.

Trading commissions from some of its biggest erstwhile international clients — BlackRock Inc. and Capital Group — have plunged, while more than half the revenue from its equities business now comes from selling derivatives to predominantly mainland Chinese clients, the people said, asking not to be named discussing private information. International hiring by CLSA has stalled without final approval from Beijing, and the Covid pandemic and a crackdown on private enterprise in China have also thwarted ambitions.  

“Given the geopolitical environment, the impact of Covid zero and the domestic political changes in China, Citic Securities probably has no other choice but to make CLSA more domestic-Chinese client focused,” said Chen Zhiwu, chair professor of finance at Hong Kong University. “CLSA’s business is bound to shrink, whether they like it or not.”

Once the largest client-trading equity brokerage in Asia, CLSA was known for its top-rated, opinionated research. It has now been subsumed by its more staid, state-controlled parent, with meetings largely conducted in Mandarin and decisions handed down from Beijing. The culture clash heated up in 2019 when CLSA’s top, mostly expat executives quit after being slammed over lavish pay and scant returns.

The firm, for sure, has also been hit by external turmoil. Hong Kong’s economy has been hammered by political upheaval and strict quarantine rules that have only been eased recently. A yearslong crackdown by Beijing on private enterprise has rocked markets and choked off dealmaking. Expat bankers and other high-end talent have left in droves to escape the city’s Covid policies and its political transformation.

Spokespeople at CLSA, BlackRock and Capital Group all declined to comment. 

While CLSA has been able to replenish its ranks to keep its Hong Kong headcount stable at about 2,000, the upheaval has dealt a blow to Citic’s ambitions of becoming China’s answer to global giants such as Goldman Sachs Group Inc. A five-year plan to add about 110 people in Japan, Singapore and Europe has stalled without final approval from Beijing and netted only a handful of hires, one of the people said. 

Beijing bosses have said CLSA should continue to hire and expand, but also in May imposed a hiring freeze in Hong Kong, one of the people said. Vice Chairman Charles Lin quit in September after being hired in early 2020 to steer its international business. Raymond Tam, its head for the American operation, left a month later.

Founded by two expat journalists in 1986, CLSA made its name by melding western and Chinese expertise, epitomizing the city’s colonial, laissez-faire past. That culture, which had helped it gain global clients, has largely vanished.

Citic has moved close to 200 people from Beijing to Hong Kong in the past two years, the people said. Most of its new hires come from second- and third-tier banks and mainland brokerages such as Shenwan Hongyuan Group Co. and Haitong International Securities Group Ltd., the people said. Many expats left during Covid as CLSA refused relocations, they added.

With almost all internal meetings now conducted in Mandarin, instead of English as before, the few remaining non-mainland senior executives, such as equities head Edward Park, are relying on translators to understand what’s being discussed, the people said. In 2020, executives at the broker were for the first time ordered to participate in China’s five-year planning process, a blueprint that the Communist Party has used to guide the nation’s economy since the 1950s. 

The transformation is hurting its business with international clients. The firm’s Asian stock trading commissions from BlackRock fell about 30% in the first half of last year from the same period in 2019, even as the US firm boosted spending almost 40% on cash equity trading with its other brokerages, one of the people said. Such commissions from Capital Group fell about 20% from 2020 when the trading was exceptionally active, another person familiar said.

CLSA Transformation

The architect of CLSA’s transformation is Zhang Youjun, the powerful chairman of Citic Securities. He ousted long-time CEO Jonathan Slone in 2019 and most of the top management followed him out the door.

Zhang stepped aside as CLSA chairman last year in order not to run afoul of Chinese rules that prohibit having too many titles. In his place he installed Li Chunbo, who had worked at Citic in Beijing since 2001 and has scant overseas experience. Li also relies on a translator to conduct business with non-mainlanders at the firm.

While Li is the nominal head, Zhang is still seen as in charge. The Citic boss, a former trader, has kept a tight rein on spending, refusing to pay market prices to hire analysts because he views research as a cost center, the people said. The firm in September pushed out the global head of corporate access after he had made a proposal to hold the its flagship annual conference in-person in Singapore at a cost more than three times higher than a virtual gathering.

Other senior managers brought from Citic include Shi Liang, the head of fixed income currencies and commodities, and Jodi Wang, the head of the executive office and human resources. At least four other top roles, including chief financial officer, head of risk and internal audits are now also taken by Citic representatives in Beijing. 

Zhang saw Citic Securities a model for CLSA, in particular when it comes to capital discipline and costs. The state-run brokerage’s investment banking income jumped 21% in the third quarter, and its profit was largely steady, outperforming most large peers, according to Bloomberg Intelligence. 

The broker has been ranked the top arranger of Chinese domestic stock sales since 2018, unseating China International Capital Corp. It ranked fifth last year in arranging stock deals for Chinese firms abroad in a market where overall deals plunged 84%. Citic has brought 18 deals to market valued at $943 million, less than half that of UBS Group AG, the top arranger in 2022.

Citic also led all banks for equity deals and initial public offerings in 2022, a year in which China firms dominated activity as the value of global IPOs plunged 70% from a year earlier, according to Bloomberg data.

Plunging Earnings

At CLSA, net income plunged 41% in the first half to 843 million yuan ($122 million), according to a public filing. Its fixed income, currencies and commodities division lost tens of millions dollars last year, while investment banking revenue at least halved, one of the people said.

Rivals are also struggling. Haitong International posted a HK$1.68 billion ($244 million) loss in the first half. 

In the past few years, the FICC team had asked Beijing to boost its capital for proprietary trading by at least five-fold from about $100 million, one of the people said, but was ambushed last year by a slump in China’s credit market. Inexperience in hedging trades also contributed to losses. The division has even canceled its Christmas party after posting losses, people familiar said.

“I don’t think they anticipated how the geopolitics and domestic politics would change in the succeeding nine years” after the takeover, said Chen at Hong Kong University. “They’re trying hard to salvage this and keep some value.”

(Updates with other senior executive departures in the ninth paragraph. An earlier version was corrected due to misspelling of company name.)

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