Analysts in firing line amid cost cuts

Tide turns for mainland brokerages as prolonged market slump takes toll

Brokerage analysts in China are confronting a harsh new reality.

The industry, which employs thousands of people who research and opine about stocks, the economy and markets, is retrenching after years of expansion.

At Guotai Junan Securities, a state-owned brokerage based in Shanghai, several senior analysts recently resigned after deciding not to accept pay cuts and stricter performance metrics.

One Shenzhen-based brokerage laid off 40 per cent of its analysts in the first quarter and slashed their 2023 bonuses by more than 50 per cent. Other industry players are reducing meal and travel budgets.

The cutbacks come as a prolonged market slump reduces trading commissions and authorities tighten limits around what research analysts are allowed to publish. It is a stark turnaround from a few years ago when securities firms were hiring aggressively and offering compensation of 10 million yuan (HK$10.8 million) or more to star analysts.

“Now with the trading fee cut, the bubble in the research circle will also burst,” said Sun Jianbo, a former chief strategist at China Galaxy Securities who now runs China Vision Capital, an asset manager in Beijing.

Guotai Junan did not respond to a request for comment.

This account of the industry’s retrenchment is based on conversations with around 20 analysts and former analysts, who asked to remain anonymous or use only their first names discussing a sensitive topic.

Amy, 28, said she lost her job as an analyst covering the new energy sector at a medium-sized brokerage in Shanghai in February. Her former team was cut to two analysts from seven, she said.

A few weeks later, she settled for a similar job with 40 per cent less pay at a smaller firm.

“There’s no other way round,” she said. “The only thing that matters now is to stay employed. So my approach is to grab a job first and see what comes next.”

Mainland brokerages have long evaluated their research analysts by the volume of trading commissions, or “soft dollars”, they generate from fund houses and other investor clients rather than the accuracy of their calls.

The commissions, or paidian in Chinese, have led brokerages to expand their research teams aggressively and reward analysts generously with competitive pay packages.

The number of sell-side research analysts in the country grew by almost 70 per cent over the past decade to more than 4,800 currently, according to data from Vision Capital.

One of the nation’s largest players, China International Capital Corporation (CICC), has more than 300 certified analysts, while Citic Securities employs close to 200 research analysts.

Senior analysts who secured top spots at popular research contests such as New Fortune could easily earn annual packages of 10 million yuan, according to Brook Zhang, director of headhunting firm Bo Le Associates.

Those with 10 years of experience could get around 800,000 yuan in basic salary, while analysts with five years of experience were typically paid around 500,000 yuan, said Zhang, who specialises in hiring financial professionals.

Annual bonuses are usually equivalent to around 10 to 12 months of basic pay. They can reach 24 months in good years, and can be as little as three months of pay in bad years.

That tide is now turning after China proposed late last year to cut trading fees paid by public investment funds and asked money managers not to use commissions to pay for research from brokerages.

At the same time, investors have become less keen to put money into the country’s stock market after its three-year losing streak, resulting in weaker demand for equity research.

Growth in other segments like proprietary trading and investment banking has also been curbed, prompting brokerages to take an axe to costs. China’s stock market rescue measures have curtailed short-selling and net sales of shares by proprietary trading desks of brokerages.

Initial public offering activity in the country slowed sharply in the past year, hitting investment banking revenues, and that malaise is expected to continue as Beijing tightens listing rules and beefs up checks on malpractices.

The combined profits at mainland brokerages dropped by more than 20 per cent in 2022, snapping a three-year growth streak, according to data from the Securities Association of China. Profits fell by a further 3 per cent last year.

Analysts in China rarely issue “sell” ratings on stocks. They also have to be increasingly careful about what they say and write in research reports.

Last last year, CICC warned its analysts against making bearish calls or negative comments about the economy or markets in both private and public discussions.

The large pool of analysts would need to shrink to get rid of “redundant research capacity”, Vision Capital’s Sun said.

“We’re now just in the early stage and the restructuring going forward will be a rather long and painful process,” he added.

There’s no other way round. The only thing that matters now is to stay employed AMY, ANALYST