“The supply-side reform of the securities industry is gathering pace,” said Xu Yizhou, an analyst at Industrial Securities in Shanghai. “Mergers and acquisitions will be the key themes to trade on in the future. Top players like Citic Securities will be able to make up for their shortcomings in business by becoming more competitive.”

Years-long of the languishing performance of the broader market has sapped the demand for stocks, bruising the financials of brokerages that have since fallen out of favour with investors. A Bloomberg-compiled gauge of 25 mainland-traded brokerages has slid 21 per cent over the past five years, trailing the benchmark CSI 300 Index that has lost 1 per cent. The underperformance has continued so far this year after the industry’s gauge lost 3 per cent, in sharp contrast with the 7.1 per cent gain in the CSI 300.

Those gains are emblematic of the stability in the stock market and are a result of the policy support that is now making investors optimistic about the sector. The CSI 300 has risen 16 per cent from a February low, edging close to a bull market after state-directed buying put a floor under the market and attracted foreign investors, who turned into buyers for the third straight month in April, following a six month streak of selling.

In the current geopolitical environment, there is an increased urgency for Beijing to realise these plans. An efficient capital market powered by home-grown financial behemoths can fend off threats from Washington to cut-off access to the deep, liquid pools of US markets at a time when US-China tensions are threatening to spill over beyond trade and technology.

While emphasising the importance of preventing systemic financial risk at a high-level meeting in January, Xi proposed that China should foster a unique financing model that focuses on support for the real economy, and called on financial regulators and industry authorities to strengthen cooperation and co-ordination towards this goal.

The call for more industry consolidation has coincided with accelerated growth of global banks in mainland China, with a clutch of these financial giants gaining majority control of local joint ventures. Goldman Sachs now has a wholly-owned Chinese unit, while Morgan Stanley and JPMorgan Chase each own a 100 per cent stake in their local asset-management firms.

While China’s stock market is already the world’s second largest after the US, its financial brokerages lag far behind the global leaders. The market capitalisation of Citic Securities, at 267 billion yuan, is only a fifth that of Morgan Stanley, the biggest investment bank in the US, while its profits are less than 30 of its American peer, Bloomberg data showed.

“A financial superpower needs a strong capital market as well as intermediary organizations,” said Xu Yishan, an analyst at Founder Securities. “Nurturing top brokerages is the priority given the aim to become a financial superpower. Mergers and acquisitions among brokerages will become a long-term industry trend.”

Guolian, a brokerage owned by the Wuxi government, will make its way into the industry’s top 20 in terms of net assets upon completion of its buyout of privately held Minsheng Securities. That is also the first publicly announced industry takeover since the State Council’s nine-point guideline last month.

Guolian’s shares have rallied 25 per cent in Hong Kong after the plan was unveiled and its Shanghai-traded shares have jumped 17 per cent.

Zheshang’s stock surged 7 per cent on the day in Shanghai when the Zhejiang province-based securities firm said it would bid for the stake in Guodu Securities, a smaller rival whose shares are traded in the over-the-counter market. Should the tender be successful, Zheshang will gain a 34 per cent stake in the peer as its controlling shareholder.

More consolidation is on the way. Huachuang Securities’s acquisition of a 10.9 per cent stake in Pacific Securities is now awaiting CSRC’s approval. Huachuang is a medium-sized securities firm based in the southwest Guizhou province.

To be sure, not everyone is convinced that the worst is over for the troubled sector. HSBC Holdings cut the price targets for CICC, Huatai Securities and Haitong Securities to reflect weaker first-quarter results and its view that the industry’s performance will continue to be under pressure due to a slump in initial public offerings (IPOs) and the reductions in service fees that brokerages can charge.

“Policies are actually becoming not that friendly for the brokerage industry as IPOs dry up and more regulatory supervision means less innovation for the entire industry,” said Dai Ming, a fund manager at Huichen Asset in Shanghai. “Even in the case of mergers and acquisitions, the regulator will check for misconduct such as insider trading before approving the deal.”

Dai said he sold some of his holdings in brokerage firms last month, taking advantage of a rebound triggered by the State Council’s guidelines.

First-quarter profits for the 51 listed brokerages slumped 23 per cent from a year earlier, according to Haitong Securities, as the regulatory curbs on new share sales and short selling as part of the market-boosting measures hurt revenues. IPO volumes tumbled 64 per cent in the first three months, while the outstanding value of leveraged trading slipped more than 4 per cent, the brokerage said.

Haitong expects stability in the stock markets to help the industry post a 13 per cent growth in full-year profits, and has a buy recommendation on bigger firms like Citic Securities and CICC as they stand to benefit the most from the industry consolidation.

The industry’s valuations still remain depressed despite the policy tailwinds. The market value of the 25 brokerages comprising the Bloomberg gauge is 1.01 times the book value, below the past decade’s average of 1.78 times. The multiple for Citic Securities is 1.1 times, compared with the 10-year average of 1.6 times, Bloomberg data shows.

A lower base of 2023 earnings means that a turnaround in business performance would not be difficult to achieve this year, particularly as the regulator ratchets up support for the capital market and the securities industry, according to Zhang Jingwei, an analyst at SDIC Securities. All these measures will help revive investor confidence and drive a re-rating of the sector, outweighing the headwinds from factors like a slump in IPOs and tighter regulatory surveillance, he said.

“The flurry of government measures indicates support for the good and a drive to weed out the bad,” said Sun Ting, an analyst at Haitong Securities in Shanghai. “That will help to push forward the transformation of the industry and boost the core competitiveness, driven by intrinsic growth and mergers. Big players will be the big beneficiaries from the consolidation.”