In order to understand how good or bad a deal that is, it’s useful to look at the experience of the first movers, Goldman Sachs/Gao Hua and UBS Securities. The Goldman venture in particular, being the first to be founded in 2004, involved labyrinthine arrangements to get off the ground (see box below on these deal structures and ownership) but as compensation for the hoops they had to jump through the two banks received an extraordinary opportunity. Not only did they get a significant first mover advantage when the door closed behind them for two years, and the (perhaps mixed) benefit of years of close involvement with the CSRC, but they also got permits for a broader suite of activities including secondary trading, brokerage, research, and in UBS’s case wealth management.

What’s most informative for the new arrivals, though, is just what the houses did with this opportunity. For while one can argue both have been successful, they have chosen dramatically different paths to success and there is scarcely any area when one could argue both have thrived. It’s almost as if they agreed to split the opportunity in half.

If the criterion is league table success then UBS has clearly been the more successful. China’s debt markets were one of the most exciting market stories of 2008: as credit dried up everywhere else in the world, and IPOs wilted, this market instead found its voice as investors looked for safer securities and companies looked for new sources of capital. The 10 largest ex-Japan Asian local currency bond deals last year were all in renmimbi, according to Dealogic; China Ministry of Railways alone raised Y70 billion in three bonds between September and November last year, as the world’s financial systems were crashing. “China has been over 90% bank debt financed until recently,” says Philip Partnow, managing director and deputy head of investment banking at UBS Securities, UBS’s Beijing venture. “If even a small percentage of that gets refinanced in bond form, that alone would suggest very strong growth for bond products in 2009 and beyond.”

UBS has taken full advantage, taking bookrunner roles on two of those Ministry of Railway deals, and big transactions for Legend Holdings, China Merchants Bank, Shenzhen Development Bank and others. UBS did also get on a couple of equity deals in 2008, such as the $200 million-equivalent IPO for Shanghai Metersbonwe Fashion & Accessories in August, but the market for A-share offerings is now pretty much shut.

But has UBS done anything else with its licences? A look at the income statement for 2007 for UBS Securities – so before its stellar year for bonds in 2008 – shows that of total net fee and commission income of RMB974.6 million, RMB824.9 million of it came from underwriting income, and just RMB2.1 million in brokerage income. Granted, this distinction is unlikely to be so marked when full year numbers are printed for 2008, and things like research probably help revenues that show up elsewhere in UBS, but it is fair to say debt underwriting has been the mainstay of the business despite a suite of licences that allows it to do a host of other things from onshore wealth management to institutional brokerage.

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