Goldman went straight after this business firstly by building a research team in much the same style as it has elsewhere. Kelvin Koh, a Goldman managing director who heads the Goldman/Gao Hua research team, says when he joined the team covered less than 10 stocks and ranked 101st out of 115 brokers in terms of revenue. Today the broader China team (the Gao Hua one, with 13 writing analysts, and Goldman’s broader China team are integrated) covers 190 Chinese stocks onshore and offshore, including 86 A-shares, and Koh says that by 2007 it ranked seventh nationwide in overall mutual fund commission revenues.

UBS has been active here too, covering roughly as many A-shares as Goldman and with a similar model of integration into global coverage. “In general the research the domestic houses produce is  much closer to the old-fashioned stock picker model as opposed to the analytically-driven fundamental research approach we bring into the market,” says Partnow. But he himself admits that the revenue that tends to follow from a good research side – institutional brokerage, for example – could be stronger. “It’s an area of traditional strength for us and we are building it up.”

This, then, has big ramifications for the new licensees and those still in the queue. If the Goldman model is right, and the way to build a profitable business is by focusing on the secondary and commission-based revenues rather than just underwriting, that’s not good for new ventures for whom these areas are strictly off limits. “We think the JV will be able to do well based on the primary business, there are sufficient deal flows,” says Zhang at Credit Suisse. But the venture would clearly like to be able to do institutional sales and brokerage too. “We feel confident that CSRC will consider the secondary licence for the JVs like us in the foreseeable future, we have no doubt about this,” he says. “Our understanding is CSRC will grant secondary licences in a couple of years’ time based on further liberalisation of the capital markets and also based on the performance of the JV.”

The first movers have other advantages too, like being able to develop wealth management onshore (Goldman is now building a business in this area as UBS has done). Also, while the close interaction with the CSRC in the early years of the ventures could occasionally be thorny, Goldman in particular has been active in helping develop the market through advising on new regulation or working closely with government and regulators. Gao Hua insiders talk about being “a laboratory” for the CSRC, while Keogh says Goldman has “always treated CSRC as customer number one”. And while that has no doubt made some onerous demands on headcount, there seems to be a payoff: the Gao Hua venture is believed to be one of the only brokers permitted to bring investors “across the wall” to gauge their interest in block trades – a key issue as the government faces reform of non-tradable shares. This permission, which is understood to reflect a lot of involvement by Gau Hua with the Shanghai Stock Exchange and the CSRC in thinking through the logistics of block trades in China, will likely prove highly lucrative when sellers decide to return to the market.

“You’ve got to find the right timing, that’s the key,” says Zhang Xing, chairman of Gao Hua Securities. “You have to use the right timing to promote your own knowledge and products so the regulator will accept your idea and be supportive.”

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