Why mega merger means capital gain for China's financial goal

Editor's note: Matteo Giovannini, a special commentator on current affairs for CGTN, is a finance professional at the Industrial and Commercial Bank of China and a non-resident associate fellow at the Center for China and Globalization. The article reflects the author's views and not necessarily those of CGTN.

China's aspiration to become a global financial powerhouse is a critical part of a broader strategy to elevate its influence on the world stage, diversify its economic growth, and reduce dependence on foreign financial systems. As the world's second largest economy, after significant strides in economic and technological advancements, building a world-class financial sector remains one of China's most important objectives.

On September 5, two of China's largest state-backed brokerages, Guotai Junan Securities and Haitong Securities, announced they would merge. The merger would create a new behemoth in the financial sector with assets of $230 billion, surpassing CITIC Securities as the largest brokerage in the country.

This move is part of a broader strategy to consolidate China's $1.7 trillion financial sector and build stronger, globally competitive investment banks that can rival Wall Street giants. With the nation's securities watchdog supporting consolidation, China's long-term goal is clear: to have two or three investment banks that can compete internationally by 2035.

The creation of the new behemoth reflects China's increasing determination to play a more influential role in the global financial system. Historically, Chinese financial institutions have been focused on serving domestic markets, with limited forays into the highly competitive world of international finance. This merger signals a clear shift in strategy: China is no longer content with being a regional financial player. Instead, it seeks to challenge the Western-dominated financial order.

The timing is no accident. Over the past decade, Wall Street's biggest firms have deepened their presence in China, taking advantage of the country's gradual opening of its financial markets. Global financial giants have been expanding their foothold, providing a range of sophisticated services, from underwriting to wealth management, that local firms have struggled to match. In response, China now seeks to cultivate homegrown financial institutions that can not only compete domestically but also venture into global markets with the expertise and scale required to challenge Western firms.

There are several clear benefits to this bold move. First, scale matters in global finance. By combining two of the largest brokerages in China, the new entity can leverage its significant capital and resources to enhance its competitiveness. Scale allows for greater efficiency, lower operational costs, and the ability to take on larger, more complex deals such as mergers and acquisitions, cross-border IPOs, and global debt offerings. With this merger, China's new brokerage giant will be better equipped to compete with established players in international capital markets.

Second, the merger strengthens China's financial resilience. A larger, more consolidated financial institution can better withstand economic shocks and market fluctuations, both domestically and globally. By reducing fragmentation in the financial sector, China is also creating a more robust platform to attract foreign investment and facilitate outbound investments, which are key to its strategy of global financial integration.

Third, this move is part of a broader trend in which China is vigorously modernizing its financial infrastructure. The newly merged entity will likely invest in digital technologies, artificial intelligence, and blockchain to stay competitive. This is an area where Chinese financial institutions have already made significant strides, as seen in the rise of fintech giants like the Ant Group and Tencent. If China's brokerage sector can integrate advanced technology into its services, it will gain a competitive edge in the global financial industry.

However, while the creation of this new brokerage giant is a significant step forward, China's journey to becoming a global financial powerhouse is set to be a long one. Wall Street firms have spent decades building relationships with global clients, navigating complex regulatory environments, and developing expertise in cross-border transactions. By contrast, Chinese financial institutions are relatively new to the global arena and therefore lack the deep networks and experience required to execute large-scale, sophisticated deals.

For China's financial institutions to truly compete on equal footing with the likes of Goldman Sachs or JPMorgan Chase, they will need to not only grow in size but also in sophistication, talent, and credibility. They will be able to achieve success only once they get past this hurdle.

Time will tell whether the attempt to build a first-class investment bank can take on Wall Street, but one thing is certain: China's financial ambitions are bigger than ever, and the world will be watching closely.

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