Loosening the ties

By Cong Mu Source:Global Times Published: 2012-10-23 22:55:04

 

Tourists at the Happy Valley theme park in Wuhan, Central China's Hubei Province. Photo: CFP
Tourists at the Happy Valley theme park in Wuhan, Central China's Hubei Province. Photo: CFP



On a sunny autumn day in Beijing, Deng Wenyi, 28, a product manager in the wealth management department of Huaxi Securities, left home at 7 am to go to the Happy Valley theme park near the East Fourth Ring Road in Beijing.

When she came out of the theme park at around 6 pm, she was exhausted and exhilarated.

"We waited in line for two hours for a single ride, the Crystal Wing roller coaster," Deng told the Global Times.

Betting on growing revenues from the Happy Valley chains across the country, CITIC Securities, a major securities brokerage in China, is planning to release an innovative securities product backed by the theme park's future ticket revenue. It submitted an application to the China Securities Regulatory Commission (CSRC) on July 20, and is expecting to receive a decision from the watchdog soon.

Happy Valley's operator, State-owned OCT Enterprise Co, said in a statement on its website on October 9 that the theme parks received 5.4 million visitors during the peak season between July 1 and October 8 this year, grossing 780 million yuan ($124.7 million) in sales, up by 13 percent and 26 percent year-on-year respectively.

OCT Enterprise, which is listed in Shenzen, forecast that it would generate 1.6 billion yuan in sales this year, according to the statement.

The Happy Valley asset-backed securities (ABS) launched by CITIC Securities is the first corporate ABS product to be reviewed by the CSRC this year. China started testing such financial derivatives in 2005, but stopped after the global financial crisis in 2008, which exposed the vulnerabilities of highly leveraged financial products.

The CSRC started accepting ABS applications again in July. It is currently reviewing six corporate ABS applications, including four submitted by CITIC Securities.

GF Securities and Haitong Securities also submitted applications on Friday, with reviews still pending, the CSRC said.

Experts told the Global Times that 2012 has seen the start of an explosion in financial innovation for securities houses in China, and it was made possible by deregulation.

Removing restrictions

The central government has taken measures to give the securities industry more leeway to operate and introduce innovations this year, at a time when the stock market has been experiencing its worst performance in more than five years.

The State Council on October 10 announced a sixth batch of deregulation policies since 2001, involving a total of 314 items. In a country where becoming a cashier used to require a government permit not so long ago, this was seen as a significant step.

Also, 32 of the items set for deregulation this time were concerned with the CSRC. The stock market watchdog will cancel a further 20 approval requirements, having already canceled a total of 136 administrative approval items since 2001, the China Securities Journal reported October 15.

The securities firms will no longer need to ask for permission when launching a new ABS product, but must only register with the CSRC. The regulator has also promised not to set up any other new hurdles to replace the canceled approval requirements in the future, the news report said, citing an unnamed CSRC official.

The ABS approval process by the CSRC takes more than two months, so with approvals no longer needed, the securities companies can act more swiftly to respond to market movements, said Deng of Huaxi Securities.

Also, the securities firms will not need permission from the regulator any more when doing intermediary business for the futures companies, according to the new round of deregulation policies.

This will increase revenues for the securities houses, Deng said.

More innovation

The Chinese securities industry's revenues soared to 163 billion yuan in 2011 from 13 billion yuan in 2005, but "the business model on which the industry's success is built - retail-dominated, cash-market-focused, undifferentiated, and low skill - is unsustainable," US consulting firm McKinsey & Co said in a white paper sent to the Global Times on October 10.

The industry "remains dominated by large and mostly undifferentiated domestic firms," the company said.

The firms' business models "are only sustainable in a context of a bull market," and  they need to diversify their business models in the next few years, Emmanuel Pitsilis, a co-author of the white paper at McKinsey, told the Global Times on Friday.

The speed of deregulation and the speed at which some of the reforms are to occur will determine how fast the change will need to take place, he said.

Asset management is an area of innovation the securities firms are focusing on, having been given the green light by the government. It has traditionally been dominated by trust companies, regulated by the China Banking Regulatory Commission.

But recently, the regulators formed a consensus to allow the securities firms to participate in management of five categories of assets, 21st Century Business Herald reported on October 9, citing an unnamed executive in a securities company's asset management department. The categories are utilities assets; toll gate and public infrastructure assets; city engineering project assets; commercial real estate leasing assets; and corporate equipment leasing, large receivables and financial leasing assets

Jim Yeh, a senior advisor to the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, told the Global Times on October 17 that the CITIC Securities Happy Valley product will very likely be backed by multiple years of expected receipt revenues from the park.

As many local financing platforms have been shut down, many local government-owned firms cannot get loans from banks. "There will be more securitization of local scenery parks' ticket receipts and toll gate fees in the future. That is to say, these entities will have to sell their future revenues (either through trusts or securities firms) to get money to build their current projects this year," Yeh predicted.

Judging from the robust tourism growth evident in the recent National Day holidays from September 30 to October 7, Yeh said that there will be ample theme park receipt assets for the securities brokerages to manage.

However, a new product does not provide sustainable differentiation against competition, and there are many other things to improve, including differentiations on service, information access, speed of innovation or branding, said Pitsilis. "The journey will take 10 years."

 



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