Brokers, or Just Broken? What China’s Reforms Won’t Fix

Beijing is loosening the reins on its large brokerages as the financial system looks ever creakier. Previous attempts to build a Chinese version of Goldman Sachs Group Inc. haven’t had much luck. This time may be no different.

China’s capital markets are in desperate need of reform, and securities companies are key to their growth and luring in foreign investment. The China Securities Regulatory Commission revised draft regulations in recent months that rate the financial standing of brokers and focus on an increasing worry, their capital buffers. Yet the new rules will do little to force more scrutiny or to strengthen the largest brokerages, which are testing them in a pilot program. Instead, a key change in how metrics are calculated will lead to a potentially dangerous outcome: Brokers who helped drive the market off a cliff five years ago will once again be able to expand their balance-sheet leverage.

China’s brokers aren’t in the strongest position. Much hope has been pinned on reforms for the Nasdaq-like ChiNext board, which may help increase initial public offerings, and on the over-the-counter National Equities and Exchange, a potential aid to investment banking. Various other changes over the years haven’t resulted in the desired first-class world brokerage, and neither will these if the institutions aren’t robust and sophisticated enough to operate alongside foreign peers.