Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The JV between Deutsche Bank and Shanxi Securities, which is named Zhong De Securities Company, will not be able to start operations just yet since it is also required to apply for a business permit. While awaiting that, the two partners will put the finishing touches on the operational structure of the JV. Assuming the business permit comes through, Zhong De Securities is expected to be up and running by the third quarter this year.
The Beijing-based JV between Credit Suisse and Founder, named Credit Suisse Founder Securities, received regulatory approval in June last year and with last weekÆs business permit that firm is now ready to start competing in the domestic market. According to a press release issued last week, Credit Suisse Founder Securities will initially focus on the sponsoring and underwriting of A-shares, as well as government and corporate bonds.
Aside from the fact that the Credit Suisse JV will be entering the market about six months ahead of the Deutsche Bank JV, the two European firms will at least on paper have a similar exposure to the domestic Chinese market. In accordance with Chinese regulations, they will each own one-third of their respective JVs, while their Chinese partners will own the remaining two-thirds. Also, the licenses allow them to underwrite Chinese equity and bond issues, but not to conduct brokerage operations. Stockbroking is one of the most profitable areas of the securities business in China, but new regulations issued in December 2007 stipulate that sino-foreign securities JVs will have to wait five years after their establishment to expand their businesses to include an A-share brokerage license.
Still, most international investment banks are keen to get an underwriting license and to be able to help arrange new share issues in China û especially since the Chinese government has over the past 18 months been seen to prefer large Chinese companies to list in the domestic market first, before they list in an overseas market like Hong Kong. Some companies have got around this by doing a near simultaneous listing with their shares debuting in Shanghai only a few days before they start trading in Hong Kong, but there is obvious concern that more and more Chinese companies will eventually list only in the domestic market û putting their business out of reach for international investment banks without a securities joint venture in China.
Credit Suisse and Deutsche are the first two international banks to get approval to set up a sino-foreign securities company since a moratorium on sino-foreign securities JVs was lifted in May 2007 and following the new regulations announced in December of that same year. Goldman Sachs and UBS, however, received a special dispensation to set up business in China prior to 2007 through different routes. Goldman through its joint venture with Gao Hua Securities and UBS through its direct 20% stake in Beijing Securities.
Meanwhile, CLSA has a JV with Hunan-based Fortune Securities under the name of China Euro Securities (CESL), which was set up in 2003 under regulations that were introduced as a result of ChinaÆs entry into the World Trade Organisation in 2002. Pursuant to the five-year rule, CESL was granted a brokerage license for the Yangtze River Delta area in June last year, in addition to its underwriting license.
The only other international investment bank to have direct exposure to ChinaÆs domestic market is Morgan Stanley which set up the very first joint venture (China International Capital Corp) together with China Construction Bank in 1995 û although this ôpilotö programme turned out to be a one-off at the time with no further approvals granted until after ChinaÆs WTO entry. These days, Morgan Stanley has no management input into the JV, but receives revenues in proportion to its 33% stake. The US investment bank is keen to establish a new JV in which it will have more direct influence, however, and did sign a memorandum of understanding with Huaxin Securities in early 2008 to that effect. However, sources say Beijing has made it clear that it will not grant an approval as long as Morgan Stanley still holds a stake in CICC and the situation currently appears to be deadlocked as Morgan Stanley doesnÆt want to sell its CICC shares (and risk losing a lucrative revenue stream) before it is certain that an approval for a JV with Huaxin will be forthcoming.
Separately, Citi is also awaiting approval to set up a securities JV after signing a MoU with Zhongyuan Securities in early 2008.
ôChinaÆs domestic investment banking services market has long been a coveted crown jewel for many global banks looking to expand their footprint and reach in growing emerging markets. The investment case for China has not changed for us despite current market sentiment,ö Kai Nargolwala, Credit SuisseÆs CEC for Asia Pacific, was quoted as saying in last weekÆs press release.
ôThe joint venture is entering the market at a crucial time, as China continues to see solid demand for corporate finance services and clients increasingly look to quality of advice,ö added Wei Xin, chairman of Founder Group.
Meanwhile, Deutsche Bank stresses that the approval to set up a securities JV is the final licence that it needs in order for its core global businesses to operate in China. The German bank has made significant investments in China over the past 12 months and has a 30% stake in Harvest Asset Management and a 13.7% stake in Hua Xia Bank. It also has a derivatives license and is locally incorporated in Beijing, which means it can roll out a branch network, should it decide to do so.
Shanxi Securities was founded in 1988 and is among the first group of securities firms set up in China. It has more than 53 branches in Shanxi province and other major cities, including Beijing, Shanghai and Shenzhen, and over 800 employees.
One issue that was left out in the releases from both Credit Suisse and Deutsche Bank was the level of management control that they will have over their JVs. China caps the investment by foreign banks into a JV at 33% and direct stakes in a securities firm at 20%, though the level of management control varies between each JV.
Both Goldman Sachs and UBS, while abiding by the current ownership rules, have effective operational control over their China businesses.
Whether or not Credit Suisse and Deutsche Bank have been able to secure similar agreements remains to be seen and will depend on things like board composition and veto rights û details of which havenÆt been made official. In both JVs the CEO will come from the international bank, while the chairman will come from the Chinese partner.
Credit Suisse said that Founder SecuritiesÆ chairman, Lei Jie, has been appointed chairman of Credit Suisse Founder Securities, while Neil Ge, formerly managing director of Credit SuisseÆs investment banking representative office in Shanghai, has been appointed CEO.
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