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Commission-cut war never ends
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QING HUI has dabbled in shares since 1998 when she was laid off from her job at a State-Owned enterprise.
"I'm not an idiot. Why not try to make money on the stock markets like others do,"she said to her husband, expecting to make a fortune by trading shares listed on the two exchanges in Shenzhen and Shanghai.
Like millions of the country's other retail investors who hope to make money on China's fledgling stock markets, Qing traded frequently but was disappointed to find out that she has barely made any money over the past two years.
"For most of the past two years, I've been busying myself working for the brokerage houses,"she jokingly grumbled, implying that most of her hard-earned returns couldn't even cover the transaction costs.
Currently, a Chinese investor is obliged to pay 0.75 per cent of the transaction value for each purchase or sale of stocks, namely, 0.4 per cent levied as stamp duty and 0.35 per cent charged as brokerage commission fees.
Over the past 10 years, China has made several minor adjustments in stamp duty to boost the stock markets, reducing it from the initial 0.6 per cent in 1990 to the current 0.4 per cent.
As the levy of the stamp duty is decided by the Central Government, there is no sign of further reduction in stamp duty despite the fact that it is the highest in the world.
But things are quite different when it comes to the brokerage commission fee.
Open secret
Pakistan is believed to lead the world's 27 main stock exchanges in brokerage commission fee by charging a 0.5 per cent fee of the transaction value for each purchase or sale of stocks, to be followed by China with 0.35 per cent.
"The current commission structure is too high. It's hurting investor's interest to trade in the market,"said Fan Lin, marketing manager of Qinghai Securities.
The stock exchanges in China have set the 0.35 per cent fee as a benchmark rate for stock trading, but the final fee is usually set by the brokerage houses and their clients. This is an open secret widely known in the industry.
However, only a small handful of institutional investors can get this kind of preferential treatment and millions of the country's retail investors like Qing are excluded from the practice, which is carried out secretly.
In fact, China's stock regulators have already felt the heat to reform the current brokerage commission system.
A survey conducted by the Securities Association of China (SAC) in April last year indicated that almost 90 per cent of the respondents knew that the underground practice of commission fees rebate and said that the current commission should be reduced.
Ma Qingquan, secretary-general of SAC, called for a reform in the present commission structure since "it is ineffective in attracting capital, clients as well as improving market liquidity."
The boom in China's online stock trading over the past year finally turned retail investors' dream of equal treatment with institutional investors into reality and Qinghai Securities fired the first salvo.
Online trading
The wide use of the Internet in recent years provides enormous opportunities for financial firms and a global surge toward online stock trading effectively revolutionize the way of stock trading.
The advantages of low trading costs, improved execution speed and easy access brought by online trading are prompting more and more stock investors to switch from traditionally phone-based to online trading.
The United States boasts the world largest online trading market, with more than seven million investors trading online.
South Korea, the world's second biggest online trading market, leads Asian countries with 60 per cent of all trading done online.
A lot of online businesses are not thriving in the financial realm in China, but the Internet is slowly changing the landscape of the financial service industry.
A study conducted by Shanghai Stock Exchange showed that there were only some 250,000 online traders in China, accounting for 0.43 per cent of the country's 58 million stock investors.
Anticipating a rush of online traders in China, the world's fastest-growing market which claims to have more than 10 million Internet users, nearly all Chinese brokers are launching online trading services, eyeing positions at the digital crossroads.
As stock traders are not switching online as rapidly as what was expected, there is a need to aggressively court online traders.
In order to address that problem, brokers, such as Qinghai Securities, have discounted online trading to reflect its lower costs, while such discounts have been a major factor driving online trading in the United States and South Korea.
"As online trading can dramatically reduce the operating costs of the brokerages, cutting commission fees can both benefit both the investors and the brokers. I see no reason not to lower it,"said Tang Ming of Everbright Securities.
Fee-cut war
A relatively unknown securities broker which was established in 1997 with registered capital of 54 million yuan (US$6.52 million), Qinghai Securities has only seven branches operating in the country.
But the once-obscure company has a very ambitious goal to become China's Charles Schwab, leading US online broker that claims to have 3.5 million online customers.
To gain a firm foothold in what is expected to be the next battleground for China's securities industry -- online trading, Qinghai Securities aggressively rolled out incentives in hopes of harvesting a bumper crop of new investing accounts.
The firm caused quite a stir early last November by announcing a discount on its commission fees of up to 65 per cent to all of its customers.
Qinghai Securities' Fan said that the brokerage house aims to amass enough volume to offset the reduced brokerage commission fees.
The move to slash fees by Qinghai Securities paid off well, bringing in hundreds of new investing accounts every day.
Zhong Xiaojian, general manager of Qinghai Securities, said his firm did not want to take this opportunity to "make a name for itself."
"We just want to get more clients,"he said.
It also drew the ire of some competitors and prompted others to imitate the price cuts.
Guosen Securities quickly followed suit by offering a 50 per cent discount. Even brokers based in Shanghai and Nanjing announced commission cuts.
"The move to make commission market-oriented is a trend in the market,"Liu Weijin, an analyst at Guosen Securities said.
However, not all are happy about the discount promo.
Chen Hui of newly-launched Guangdong Securities called it "not a good practice which will hinder the further development of the brokers and can hurt the securities industry as a whole."
While Huatai Securities, claiming to be China's largest online trader with 170,000 online customers, said Qinghai Securities "isn't playing by the rule."
Yao Wanping, a senior analyst in Huatai Securities, said such cutthroat competition is unhealthy and short-sighted.
Instead of giving discount, Yao said that online brokers should use better service and product to lure in customers.
However, the much-heralded commission-cut war turned out to be short-lived. The market regulator intervened before more brokers got involved.
Several days after Qinghai Securities announced commission cut, Gao Xiqing, vice-chairman of the China Securities Regulatory Commission, said that brokers should observe present laws and stock exchange regulations on brokerage commission shouldn't excuse themselves for lowering their commissions for securities trading.
Gao was followed by a circular issued by the two exchanges forbidding member brokerages to offer any further discount.
Market regulators also promised to take action to adjust the present commission structure, but before the unveiling of the new rules, commission discount is still prohibited.
International trend
As many analysts point out, regulators' intervention is just the beginning, not the end, of China's brokerage commission reform.
"Many brokers are not expecting the market regulators to step in since the commission discount is one way of attracting more people into the stock market, "said Tang Wanmin of Eagles Securities.
In fact, freely negotiable commission is widely practiced in the world, with 13 of the 15 largest stock markets--by market capitalization--in the world having adopted a system of free negotiation.
Most major international derivative exchanges have also adopted a system of free negotiation.
As more and more stock markets have chosen freely negotiable commission, many Asian countries feel the pressure and have to change their practices from fixed fees to negotiable one.
Singapore liberalized its commissions in October last year, followed in December by Thailand, which moved from a fixed fee of 0.5 per cent to negotiable with a minimum rate of 0.25 per cent and has plans to full liberalization within two years.
"It is both the regional and global trend to go for free negotiation of brokerage commission rates,"said Charles Lee, chairman of the Hong Kong Exchange and Clearing Limited, when announcing a proposal to remove the minimum brokerage commission of 0.25 per cent in May last year.
However, a freely negotiable commission to replace China's present commission structure, as many experts believe, will do no good to the securities industry. Instead, many suggest a step-by-step reform.
SAC's Ma suggested a floating rate to replace the current fixed fees for fear that some brokerages could not stand up to a drastic change from fixed to freely negotiable commission. At present, brokerage commission alone accounts for roughly 40 to 50 per cent of most securities firms' revenues.
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