In the ever-shifting landscape of the financial markets, various factors such as plummeting risk-free interest rates and volatile stock market trends have compelled brokerage firms to pivot their focus towards dividend-yielding assets within the equity marketThis strategic move has not only become a preferred choice among several brokerages but is also projected to continue gaining momentum.

Recent investigations reveal that since last year, numerous brokerage firms have amplified their investment allocations towards dividend-generating assets, with plans to further enrich their portfolios with these rewarding options in the foreseeable futureThe advent of the OCI (Other Comprehensive Income) accounts, which showcase fair value measurements with fluctuations reflected in other comprehensive income, has also provided an advantageous cushion for brokerages wary of impacts stemming from fluctuating asset prices

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However, despite these strategic shifts, firms remain cautious about the potential adverse effects of asset price fluctuations on their comprehensive financial statements, resulting in a restrained approach towards the overall enhancement of dividend asset allocations.

Industry insiders have hinted that the increase in dividend asset allocations by brokerages is not purely based on market behavior but also significantly influenced by new financial accounting guidelinesAs the guidelines revamp the classification and measurement of financial assets, brokerages can now categorize financial investment assets into various segments, including trading assets, debt investments, other debt securities, and other equity instrumentsSignificantly, the latter includes high-dividend stocks and perpetual bonds, encompassed under the so-called OCI category for equity investmentsThis categorization allows for the seamless incorporation of fair value fluctuations directly into other comprehensive income while the dividends received during the holding period contribute to investment income, thereby imparting a stabilizing effect on short-term profit volatility.

With the decline in risk-free interest rates, the relative attractiveness of dividend assets has surged, making it a logical transition for brokerage firms to boost their focus on such investments

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A head of the stock trading department at a Shanghai brokerage, who chose to remain anonymous, stated, “The continuous downturn in risk-free returns has accentuated the relative value of dividend assets, making it a coherent strategic choice for brokerages to increase their allocation.”

Over the past two years, the performance of dividend assets has been notably impressive, propelling many of these firms to strategically anchor these investments within their portfoliosAnother brokerage personnel, known as Li Yong, shared insights on their successes, highlighting two key considerations informing their increased allocation last year: first, a significant number of firms, following the peak of capital expenditure, have exhibited enhanced dividend-paying capabilities spurred by favorable policy changesSecond, many low-priced stocks, which have improved their dividends, cleverly combine dividend stability with the potential for significant growth in stock prices.

Data from financial statements further illustrate the extent to which brokerages have ramped up their dividend asset allocations

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For instance, within the third-quarter report for 2024, several leading brokerages exhibited substantial increases in their other equity instruments, significantly from the previous year's figuresCITIC Securities noted a staggering rise, escalating their other equity instruments from 9.514 billion yuan to an astonishing 67.256 billion yuan, reflecting a monumental growth of over 604%. Similarly, Guotai Junan's figures ballooned from 1.875 billion yuan to 9.267 billion yuan, while China International Capital Corporation made the leap from zero to 1.787 billion yuan.

Statistics from CITIC Jiantou indicated that between 2022 and the mid-2024 period, the total financial investment assets amassed by 108 sample brokerages amounted to approximately 6.2 trillion yuan, 7.1 trillion yuan, and 7 trillion yuan, respectively, while the size of their other equity instruments was reported as 96.58 billion yuan, 227.79 billion yuan, and 376.09 billion yuan

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This data underlies the significant shift towards dividend assets, with the former allocations reflecting the broader strategic objectives of various brokerage firms.

Interestingly, the increased allocations towards dividend assets are not solely for the purpose of constructing proprietary bond pools; rather, this trend responds to market strategies such as long-short equity approaches, stock loaning at T+0, and various industry ETFs (Exchange Traded Funds). Nonetheless, the overarching consensus remains that the pronounced increase in valuations of dividend assets could largely base itself on a strategic pivot towards performance-driven equity investments.

Analysts argue that the divergence in asset allocation rises depending on the brokerage firm, noting that CITIC Securities stands out with their incremental elevation in perpetual bonds; however, the presence of increased dividend assets remains within the focal range of their strategy

Another leading non-bank analyst remarked on how fluctuations in the revenues of brokerage self-operated businesses can be markedly influenced by market dynamics, further emphasizing the stabilizing traits associated with dividend-class assets, which tend to offer low valuation, minimal volatility, and heightened dividend return attributes.

The appeal for sustained growth of dividend asset allocation lies not just in profitability assessments, but also in elevating the overall risk tolerance of brokerage firmsLi Yong affirmed that the innovative deployment of OCI accounts has made a notable impact on the asset allocation decisions, resulting in substantial enhancements similarly observed in the operational wings of brokerage businesses.

Moreover, a fascinating growth dynamic originates from the implementation of foreign exchange swaps, which are propelling brokerage firms' investments in dividend-centric assets

As of October 18, 2024, an initial operations quota of 500 billion yuan was established, leading to more streamlined risk control metricsOnly qualifying investments were then counted within the OCI reporting bracket, allowing brokerages access to funds at lower costs to buttress investments in high-dividend strategic assets.

The new year saw a significant evolution of participant firms, wherein the scope of institutions expanded from the initial 20 to a broader pool of 40, engaging in subsequent tranches of foreign exchange swap bidding with amounts aggregating to 55 billion yuanThe first tranche distinguished itself through a competitive bid rate of merely 20 basis points, alongside an additional blend of government bonds or central bank notes at interbank market repos, keeping the borrowing costs beneath a desirable 2.5%. This trend escalated in the second tranche, showcasing a declining bid rate, firmly positioning dividend-yielding assets as primary choices for investment strategies.

The consensus among industry observers reflects that while dividend asset allocations by brokerage self-operations exhibit notable momentum, significant opportunities for further enhancement continue to exist

An analytical breakdown provided by CITIC Jiantou unveiled the potential future growth that could encompass approximately 3.5 trillion yuan, should brokerage self-operations gravitate towards higher allocations towards the OCI assets.

Nevertheless, certain brokerage firms are channeling a more cautious approach towards increasing their dividend asset holdingsAs articulated by Wang Jun, a responsible figure at a brokerage firm, the inherent volatility associated with these assets remains a threat factor against more stable financial landscapesIt becomes quintessential that only when the overall profitability aligns favorably does the motivation to upscale allocations emerge robustly.

Another brokerage participant echoed this sentiment, underscoring the critical nature of a diversified portfolio that transcends mere reliance on dividend assets to quell potential fluctuations