Asiamoney, March 2009

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The door is open. China is once again approving securities joint ventures between foreign banks and local partners, two years after enforcing a moratorium under which only Goldman Sachs and UBS had crept in. Credit Suisse is up and running with Founder Securities; CLSA has had a previously restrictive licence crucially expanded; and in January Deutsche got the green light to set up with Shanxi Securities.

With a host of mostly American names still stuck in the queue (see box, “Who’s next?”), the new entrants are delighted with their tickets into the exciting new world of Chinese domestic securities. But there’s a catch. The newer licences permit a much narrower range of businesses than Goldman and UBS were able to negotiate, with different mechanisms for ownership and control. They are coming into a China bereft of equity offerings, into a promising but increasingly competitive and commoditised debt businesses with thinning margins, at a time when western banks are under greater cost and resource pressure than ever before.

The Credit Suisse and Deutsche licences follow new China Securities Regulatory Commission regulations on securities ventures (SJVs) which came into effect in January 2008. Credit Suisse Founder Securities got approval in June and announced the receipt of its formal business permit on December 30; it’s now operational. Deutsche confirmed its own approval, for Zhong De Securities Company, on January 6, though it will probably be the fourth quarter before it formally starts operations. (CLSA, something of a special case, is discussed in the box below.)

Both new licences carry a similar structure: in each, the international partner holds a 33.3% stake and the local partner 66.7%. In each, both institutions contribute senior people to the venture’s overall management, and the venture itself is theoretically independent and managed by neither stakeholder. Each can conduct underwriting and sponsorship of shares (A shares and foreign investment shares) and bonds, both government and corporate. Each appears to be able to conduct M&A advisory on the ground too. But that’s where it ends.

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