The first Sino-foreign joint venture to take advantage of the new WTO rules opening up the domestic investment banking industry was formally established last week. At a ceremony in Beijing attended by French prime minister Jean-Pierre Raffarin and Chinese premier Wen Jiabao, China Euro Securities was created. The joint venture brings together Xiangcai Securities and CLSA, which has taken up the maximum permissable stake of 33%.
It's been about a year since you announced the genesis of the project. Has your opinion of its desirability changed in the meantime?
Coull: No. Following a conversation I had with former Chinese premier Zhu Rongji in May 2001, it emerged that foreign and Chinese parties would benefit from a joint venture in the securities field. We got approval around christmas 2002, and the final board papers were signed last week. We perhaps lost three to four months. But there's no right time or wrong time to invest in China: you just have to get in there.
Other joint ventures such as the Morgan Stanley venture with China Construction Bank have had their fair share of problems. What makes you think you can avoid a similar fate?
That joint venture came from a previous era, and part of the problem was a conflict between two powerful partners. Here, despite our 33% stake, we spent an enormous amount of time focusing on procedures and permissions, to the extent that, for the key corporate governance issues it's more like a 50-50 joint venture. And in Xiangcai, we don't have to deal with a huge centrally-owned entity like China Construction Bank: That smoothes the way somewhat.
Why are you so optimistic about the Chinese stock market given the lamentable performance of Chinese securities companies?
It's simple. We believe that China is a long-term, durable economic growth story. And at the moment the number of good investment banks in that market are very small: China International Capital Corporation and Bank of China (International). Compare that to the over-capacity in the US and Europe. Given the size of the market, that's an inviting prospect.
But the Chinese market has a bad reputation for corporate mis-governance, fraud etc.
We are talking about developing markets. If you look at the Philippines, Malaysia, Thailand and Indonesia, they have also had their share of problems.
Won't China Euro Securities be competing against its parent company, Xiangcai Securities, and won't there also be tension between CLSA and Xiangcai as to whether a domestic or foreign listing is preferable?
No, to the first case and hopefully 'no' to the second. China Euro Securities will be the only underwriting unit in the Xiangcai Group, so there will be no overlap there. As to whether or not a foreign or domestic listing is preferable, that depends on which market is more suited to a listing at the time it's being discussed. Chinese markets and foreign markets run on quite different rhythms. At any rate, we will be giving unified advice, not tugging him in two different directions.
Are there any recent developments in the Chinese capital markets that have raised your expectation as to what this market can deliver?
Absolutely. If look at what's going in China, there is an enormous amount of restructuring and mergers and acquisition work going on. Different types of government and private ownership structures are being streamlined and harmonized. In the end, you will have a whole new set of companies, which will be ready to list or issue bonds in Chinese and foreign capital markets. Note that we will also be able to underwrite corporate bonds.
Of course, the corporate bond market is still small. Euro China won't have a brokerage license. Is that a problem?
Brokerage is a very lucrative business, and has been so in China until the last year or so. We believe it will become lucrative again once the stock markets picks up. But let's face it, many countries have powerful brokerage lobbies who don't want to see increased competition. That's the case in China, although we are reasonably confident we will obtain a brokerage license in the next couple of years.
What are you earnings prospects like for this year?
China Euro has six so-called 'channels' to the China Securities Regulatory Commission - that means, China Euro can put forward six companies as IPO candidates. We are expecting a couple of deals by the end of the year.
IPO fees are just two to three per cent, and the average deal size is $50 -100 million. In addition, you have to advise a company for around a year before the CSRC will allow it to list. Will the deals you mention be enough to turn a profit?
Possibly, depending on the number of deals we pull off, and in fact one of the deals is larger than the upper end of the scale.
We're accustomed to the idea of huge multinationals coming to China and being ready to suck up years of losses in return for market dominance in the future, does CLSA have the deep pockets for this kind of strategy?
CLSA has an excellent, 14-year record in Asia and we haven't played silly games like many other investment banks, which have indulged in risky over-expansion, poaching staff, and generally pushing up salaries to absurd levels. There's no doubt we have the capacity to sit out this downturn, induced by SARS and other factors.
Why did you buy up the maximum-allowable 33% stake (under WTO regulations) in a securities company, instead of waiting a couple of years and setting a wholly-owned one?
The financial sector is the most protected one, and the last to open up, so there's a lot to be said for starting early given the challenges involved in the process, getting a good local partner and exploring challenging new issues. As mentioned, we believe this joint ventures can work. There's a lot we can bring to the table, such as our research and private equity experience, and there's a lot we can learn from then.
It has a relatively clean ownership structure and good, independent management. We didn't want to get involved in a company with many competing owners.