China Brokers Avoid Earning Impact From Market-Saving Stock Purchases

Chinese brokerage firms who bought shares to prop up the country’s collapsing stock market last year will adopt an accounting rule to largely avoid any out-sized negative impact on their earnings, says Caixin magazine citing industry insiders.

Last year, fifty Chinese brokerage firms provided RMB220 billion (US$34 billion) to China Securities Finance Corp, a government-controlled financial institution, for the purpose of buying stocks to buttress the country’s plummeting stock market.

All these assets will be marked as "financial assets available for sale," which is reported at fair value. Changes in value between accounting periods are included in comprehensive income until the securities are sold.

This means any unrealized gains or losses are not included in earnings.

These Chinese brokerages also bought shares using their own capital, but there are little public information on how much capital each brokerage firm deployed.

The only available information on this part of the market-saving operation was China Securities Finance Corp’s disclosure last July that it had lent RMB260 billion (US$40 billion) to 21 Chinese brokerage firms for the purpose of buying stocks.

These part of the assets are likely to be categorized as "financial assets held for trading", which are reported at fair value, while unrealized gains or losses are included in earnings.

If treated as such, unrealized losses from these assets may cut Chinese brokerage firms’ 2015 net profits by around 10%, according to estimates by Caixin.

The treatment of these assets are still undetermined, and may still be changed to "financial assets available for sale", giving Chinese brokerage firms further relief on their reporting.

If accounting the unrealized losses for the RMB260 billion stock purchases, they may have caused RMB60 billion in net profit losses and a reduction of RMB100 billion in net assets for the brokerage firms, says Caixin.

Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Nina Xiang is the co-founder and managing editor overseeing editorial content and product development at CMN. Before founding CMN in 2011, Nina worked at BusinessWeek magazine in Beijing and Institutional Investor magazine in New York, writing about business and financial services. While in New York, she also served as part-time correspondent for Shanghai's financial television channel, China Business Network, as well as China Radio International, China's national English-language radio network.