China's securities firms, which have been driving this quarter's A-share market bull run, have emerged as one of the biggest winners of the recent rally, and could see mergers and acquisitions as they are on the cusp of a new era.

From June 30 to July 20, listed securities firms' share prices surged more than 27 percent, according to data from Shanghai-based market tracker Wind Info. During the same period, the benchmark Shanghai Composite Index rose more than 10 percent, with the Shenzhen Component Index reporting similar gains.

Total trading volume on the Shanghai and Shenzhen bourses reached 283.84 trillion yuan ($40.58 trillion) during the first half of this year. Based on last year's securities industry average commission rate of 0.0349 percent, securities firms' net commission income topped over 99 billion yuan in the first half, up 20 percent year-on-year, according to Wind Info.

Total turnover of the monitored 36 listed securities firms surged nearly 20 percent year-on-year to 133.88 billion yuan during the first half, and yielded a net profit of 55.86 billion yuan, up more than 19 percent year-on-year.

Zhang Yang, non-banking financial analyst from Central China Securities, said operational figures in June suggest listed securities firms may have better managed risks relating to fixed income and self-operated businesses. Brokerages have hedged the contracted fixed income businesses, which resulted in improvement of self-operated businesses in general, he said.

A pillar of the Chinese capital market reform, securities firms have seen a number of favorable policies, introduced over the past few years, helping them to expand their business scope. The registration-based initial public offering system was first experimented at the STAR Market in Shanghai in July last year and promoted to Shenzhen's ChiNext in mid-June. Policies were released in mid-February to lower the threshold of public companies' refinancing.

The market had expected more. A media report in late June said that commercial banks would soon be able to apply for securities licenses. While the China Securities Regulatory Commission said at a news conference on June 28 that it had no information to provide on the reported issuance of securities licenses to commercial banks, the top regulator also stressed the importance of the development of investment banking, which is crucial to the expansion of direct investment.

Some market people believe commercial banks' entry into the securities industry may not necessarily be a positive. But, Cao Haifeng, a non-banking financial analyst of UBS Securities, said such a perception is flawed as it underestimates the size of the Chinese securities industry. The industry has much room for growth, which will allow both banks and securities firms to expand, based on their respective strengths, said Cao.

Banks are stronger in terms of their resources like institutional clients, their reach to capital and their extensive network of branches. But leading securities firms are more capable in research, distribution and underwriting, said Cao.

"Such capabilities of securities firms are crucial now that the registration-based initial public offering mechanism has been introduced, which requires a comprehensive underwriting system. In the mature overseas financial markets, leading securities firms enjoy a larger market share while commercial banks' securities businesses can also grow organically. Small securities firms, however, will likely be pushed out of the market gradually, he said.

A flagship securities firm is also highly anticipated in the market. Since April, rumors have been swirling that industry giants Citic Securities and China Securities might merge, with GuotaiJunan Securities and Haitong Securities expected to follow suit.

The companies concerned have denied such reports. For its part, the CSRC said on July 18 that qualified securities firms are encouraged to carry out mergers and acquisitions based on market rules.

"The merger of leading securities firms will complement and strengthen each other's businesses. A flagship securities firm will thus be born, which will exert positive influence on the Chinese capital market given the experience in the mature markets," said Cliff Sheng, a partner at McKinsey & Co.

The differentiated development of the 131 Chinese securities firms will be accelerated in the following years, said Sheng. Leading companies will take a larger market share with boutique securities firms also riding emerging opportunities. Against this anticipated background, smaller securities firms will have to choose the right path forward.

Unlike mature markets like the United States where investment banking giants such as Goldman Sachs and Morgan Stanley play key roles in the capital market, most investment banking functions are performed by securities firms in China. Brokerage services, research, direct investment and investment banking are the four major business divisions of Chinese securities firms.

"While favorable policies helped to facilitate the development of securities firms, performance will be the main decisive factor in the next few years. As the Chinese capital market matures, higher requirements will be imposed on securities firms. Therefore, securities firms should strengthen their capabilities in investment, financing and brokerage services. Only in this way can they grow into investment banks in a real sense," Sheng said.