FinanceAsia: How will your strategy for China differ this year from past years? Will you continue to focus on the international deals?
WU: This year the focus regionally for Morgan Stanley was Mergers & Acquisitions, and that includes China. Last year it was predominantly equity and privatizations from China. Next year we expect that M&A will play an increasing role in China, but at the same time, our equity pipeline will keep us quite busy. We expect to do more business with the private sector and the multinationals. In the long run we hope to participate directly in China's domestic market. We have continued to do a great deal with our partners at China International Capital Corporation, and we do not expect that to change next year. CICC is clearly an important part of our overall China commitment.
CICC is unique. How will this develop going forward?
WU: CICC was created six years ago from the Chinese government's desire to create a first class local investment bank. At that time we saw there was huge potential in the China market and we invested our own capital in following this strategy. And we've delivered a first class investment bank to the Chinese government. It will probably continue to operate as an independent house. We certainly don't see CICC as a subsidiary, but as a partner and as a client.
What are your plans with CICC? Is your policy to focus on CICC and increase your stake when possible? Or might you look into another JV?
FRANCESCOTTI: We are very happy with CICC. It's a very successful joint venture. We have no plans to set up another joint venture.
Would you be interested in increasing your stake in CICC from your current 34%?
FRANCESCOTTI: That is a question you could put to the shareholders. None of the shareholders is considering a retreat. The equity is very valuable. We certainly like our investment and would be happy to increase it. However, this seems unlikely at the present time.
Do you feel that with this JV already in place, you are streets ahead of the competition?
FRANCESCOTTI: Yes, in terms of the JV we are several years ahead of the competition. We engaged early while our competitors are still looking around. That differentiates us quite powerfully.
You said CICC has been very successful. Could you tell me what contribution it makes to your revenue?
FRANCESCOTTI: Together we have been able to capture a very solid market share in China. We work together as partners on deals. It's not just a private equity investment, it's a partnership, and of course CICC gives us an advantage in terms of understanding the local market.
Are you concerned with CICC developing as a competitor?
FRANCESCOTTI: No, we are complementary to each other. CICC's strength is its focus domestically, especially on restructuring prior to an IPO. Morgan Stanley's strength is international context and distribution.
But that division of labour is the old strategy. Now international investors want to access the domestic markets. So will MS be competing with CICC on the domestic front? Isn't the point of a JV to ultimately take over the JV and access the markets directly?
FRANCESCOTTI: The regulations don't currently allow for that. What is more, we have a clear, two-track strategy in China. One track is our partnership with CICC and the exposure to China that gives us. The other track is our Morgan Stanley platform, which is independent. Currently that platform is investment banking only, because that is all we are allowed to do. However, as the regulations allow us to be active in the domestic market we will, licenses and approvals permitting.
How do you quantify the intellectual property you are transferring to CICC? How can you be sure your 34% of profits is worth this transfer?
FRANCESCOTTI: I think that is very difficult to quantify, but it's certainly not just a one-way transfer. Both sides benefit. We were asked to help create for China a first class investment bank and we feel that we have done that. That is clearly also good for the Morgan Stanley franchise in China. It has also performed well in financial terms and has significant intangible benefits.
Do you consider Goldman Sachs your most formidable competitor?
WU: Not really. Some other firms have also gained good momentum in the last year. However, apart from the Chalco and CNOOC IPOs this year, 90% of the investment banking activity has been in M&A and restructuring, where we've had a very dominant share. Some of the significant deals included Huawei's sale of Avansys, Sinopec's acquisition of National Star, and Alcatel/Shanghai Bell. These kinds of transactions as well as cross-border M&A as Chinese companies seek strategic partners will be a major trend.
Do you plan any high profile hires, in the way that SSB hired Francis Leung or HSBC hired Huan Guocang?
WU: While relationships are very important everywhere, it seems to me that the changes sweeping China - and its financing and advisory requirements - are so significant that to focus only on relationships is not sufficient. We hire executives for their technical and banking skills, primarily; not based on whom they know. That kind of relationship banking was suitable for the early days of H-share issues in the early 1990s, but not for the kind of transactions China needs to get done today. Increasingly the clients demand product and execution excellence and a constant flow of ideas from inside and outside the region. Of course relationships are very important, and we have people with outstanding relationships, but they are just one piece of the puzzle.
Are you confident about the market in China next year?
WU: This year was a poor year for domestic and international IPOs out of China. We estimate some $15 billion was raised domestically and just $2 billion internationally. In 2000, on the other hand, China saw $25 billion of domestic issuance and $22 billion in international deals, a record year. Assuming the macro economic environment improves next year, we expect Chinese companies to continue to access the capital markets - less than in 2000, but significantly more than this year. Lots of companies are preparing equity offerings such as A-share issues or possibly China Depositary Receipts. But the market cap in China is already $560 billion and it has vast potential in terms of primary and secondary markets.
Which is easier for a Chinese company, CDRs or A-shares?
WU: So far, A-shares are easier. The CSRC is working on the regulatory issues of CDRs, but it seems the real problem is fungibility - the underlying shares are foreign, and trading the CDRs in the China would be distorted by the closed capital account.
Are you looking at the usual sectors, finance, telecom, banking etc?
WU: The banking sector looks promising. Bank of China has moved into the final stage of its restructuring, and the power sector restructuring is well underway and could happen next year. Telecom restructuring is basically done. The rest of the banking sector is moving, but the bad loan problem is slowing the process down. They have transferred RMB1.4 trillion to the asset management companies. But there is another RMB1.8 trillion sitting on their balance sheets. They need substantial recapitalization, or their book value could be negative. But things are moving pretty fast, as you can see from the recent bad loans auction by Huarong that we won. So the momentum is there.
Is the B-share market dead and buried?
WU: Few companies are raising foreign exchange via B-shares so liquidity is small. Instead, these companies are accessing foreign equity markets. And they will be completely unnecessary once the currency convertibility issue is resolved.