How China’s adoption of IPO system proved fatal for $1.7 trillion brokerage industry — explained

China's $1.7 trillion brokerage industry is in soup amid major regulatory crackdown on investment bankers. The latest series of harsh clampdown on investment bankers came heavily on the country’s dealmakers after state-backed brokerages recently asked many of their investment bankers to hand over their passports and seek permission before taking up any business or personal travel, reported Hindustan Times. This was in response to directives issued by the Chinese regulators.

Amid President Xi Jinping’s years-long common prosperity campaign, a total of 8,700 investment bankers across 147 brokerages were forced to take big pay cuts and conform to other tightening measures. A significant number of these professionals engage in capital market activities, such as IPOs and subsequent share sales, reported Hindustan Times.

Since last month, Chinese authorities reportedly detained over three top investment bankers from different securities firms. According to sources, the regulators are screening initial public offerings (IPOs) and other capital-raising activities. There are fears that bankers could be called in for questioning at any time.

In addition to tightening approvals for overseas trips, the brokerages issued directives to employees that they require approval if they want to resign. Furthermore, approved for business travel will be undertaken jointly with a co-worker, while activities outside pre-approved itineraries would be restricted.

These stringent regulatory measures have cast uncertainty on the future of China's brokerage industry and domestic capital market activities, which have already experienced a significant slowdown amid faltering economy.

Official figures reveal that the total revenue for securities firms in the nation reached 203.3 billion yuan in the first half of the year, marking a 9% decrease from the previous year. Besides this, Chinese companies raised a total of 76.4 billion yuan in onshore listings this year, which marks 88% slump from a peak recorded two years ago.

Transition to IPO system

This comes after China departed from a regulatory approval-based listing mechanism and adopted a registration-based IPO system last year. Consequently, the role of investment bankers has become integral as companies have to appoint qualified banks, or underwriters, as sponsors of their listings before going public.