CHINESE mainland brokers are expected to meet challenges in business expansion and profit growth in the next few years if they don't ride the current stock rally to tap public funding, industry experts said.

Lack of a strong capital base is set to curb firms' abilities to diversify as fee-based incomes from the traditional brokerage business may dwindle due to fiercer competition, analysts warned.

"The situation tends to be that if you don't act, you will likely be squeezed out in a year or two," said Zhu Mengwei, a China Securities Co dealer. "Brokers are definitely desperate for listings now."

The China Securities Regulatory Commission wrapped up a two-year overhaul of the mainland broker sector by the end of August, closing down nearly 30 troubled stock houses and cleaning up millions of irregular accounts.

The stock authority is encouraging financially healthier securities firms to seek public share sales to shore up both capital and corporate governance before the industry is fully deregulated to foreign participation.

Currently, only a small number of foreign financial institutions have set up investment-banking ventures with local partners, but they are still barred from brokering stocks and onshore proprietary trading.

The CSRC pledged early this month to resume vetting applications by overseas companies to form underwriting ventures with Chinese brokers late this year after a one-year hiatus to facilitate the domestic industry revamp.

So far this year, Haitong Securities and Northeast Securities have taken over existing domestically listed companies for back-door listings, becoming the first mainland brokers to go public in about four years.

Before their stock issuance, the mainland stock market only had two publicly traded brokerage houses - Hong Yuan Securities traded in Shenzhen, and Citic Securities traded in Shanghai.

Guoyuan Securities in July gained the regulatory nod for a back-door listing as early as this month, while Changjiang Securities on Friday also received the nod from the regulator to acquire Shenzhen-listed Shijiazhuang Refining & Chemical.

A raft of bigger brokers have started preparatory work for initial public offerings as the market boom has made them qualify for the listing requirement of logging profits for three consecutive years.

Merchants Securities and Everbright Securities applied to the regulator last month for IPOs which may directly sell shares to public investors as early as this year, sources said last week.

"Brokers can't simply rely on trading commissions to survive as the market may turn more volatile in the coming years and the margin of the brokerage business will certainly go down," said Lu Feng, a Zhongtian Investment Consulting Co analyst. "For new businesses, they need capital guarantees as required by the regulator. So a public listing seems a must."

Chinese mainland brokerages still derive nearly two-thirds of their revenues from stock brokering. For smaller brokers without investment banking licenses, the ratio can go up to 80 to 90 percent, industry sources said.

Brokers usually charge 0.15 percent of a transaction's value as commissions, compared with the official cap of 0.3 percent. The rate has gone as low as 0.08 percent for big clients at some brokers, sources said.

To diversify revenue, some big brokers including Citic Securities and China International Capital Corp have initiated new businesses such as private equity and overseas stock investment for clients.