Investment Banking in China - Presence of Global Companies

In China, foreign institutions covet licences that allow them to form investment banking joint ventures to underwrite domestic stock and bond offerings.

Beijing has been slow to grant such licences, with only a handful of banks managing to win approval for mainland securities joint ventures, including Morgan Stanley, Goldman Sachs, UBS and Credit Suisse.

Global bank HSBC Holdings hopes to strike an investment banking partnership in China as part of its expansion in the region, the bank's Asia chairman, Vincent Cheng, said on 5.8.2008.


http://uk.reuters.com/article/businessNews/idUKHKG28266720080805




Goldman Sachs Gao Hua: In 2004, Goldman Sachs was granted approval by the China Securities Regulatory Commission to create a new investment bank, called Goldman Sachs Gao Hua (GSGH). In creating GSGH, Goldman Sachs partnered with Fang Fenglei, a well-known and politically connected Chinese investment banker, and Lenovo Group, China’s largest computer maker. As part of the deal, GSGH acquired the operating license of the failed Hainan Securities, which Goldman Sachs paid $67 million to bailout. This gave Goldman Sachs the ability to deal in mainland stocks and bonds, as well as access to China’s equity and debt markets, a privilege previously given only to Chinese securities firms. This licensure gives Goldman Sachs (through GSGH) a first-mover advantage in accessing China’s burgeoning trading and securities markets as a
principal.

Strong ties to the government will aid Goldman Sachs in positioning itself to be on the “short list” for lucrative business and assignments. Goldman Sachs has already achieved a milestone in the form of GSGH, which permits them to act as a licensed broker/dealer in China. This was realized against strong opposition from a powerful domestic broker/dealer lobby.

On the personal level, Goldman has forged partnerships with influential Chinese businessmen.
These relationships serve two functions: they generate business for Goldman Sachs
and they enhance Goldman Sachs’ relationship with the government.
Powerful businessmen facilitate economic transactions in the Chinese marketplace. The
government responds favorably to businessmen of political clout. This is called “Guanxi” (friendship) and is essential to the current conduct of business in China. GSGH, an extremely valuable asset to Goldman Sachs operations in China, was facilitated by the inclusion of Fang Fenglei as a partner. Fang is a well-known investment banker of considerable political clout who possesses many valuable ties to senior political leaders.

Another strategic partnership was formed by Goldman Sachs’ dealings with China Netcom (CN). A leading CN advisor is Jiang Mianheng, the son of China’s president. Jiang is a driving force of China’s technological advancement. Goldman Sachs’ investment in CN gives it a formidable political ally and also a possible source of revenue from technological ventures in the future.



Morgan Stanley Outfit: China International Capital Corporation (CICC), the investment bank joint venture between Morgan Stanley and China Construction Bank, had been in service for nearly a decade and was believed by Chinese businessmen to have the best reputation. Upon entering the market with Goldman Sachs Gao Hua, Goldman Sachs mined much of CICC’s talent, including head of operations Fang Fenglei.This resulted in the transfer of 15 of 45 GSGH staff from CICC.



Opportunities

The Chinese market is one of unparalleled economic growth. Every week,
more than $1 billion in foreign direct investment (FDI) comes into the country. China has averaged a 9% increase in its gross domestic product (GDP) over the past 25 years. The growth rate of foreign trade has averaged 15% since 1978. In 2005, China accounted for 30% of Asian business transactions (excluding Japan).

Chinese firms have begun investing heavily abroad. In 2003, Chinese firms invested
$3.32 billion overseas. Lenovo, a Chinese computer giant, recently acquired the personal computer division of IBM in a $1.75 billion deal. CNOOC, a Chinese oil company, was recently engaged in a bidding war for U.S.-based Unocal that topped $18.5 billion. These examples demonstrate the market for investment banking services that arises in China as Chinese companies have capital and are willing to deploy it strategically to enhance their business.


The Union Bank of Switzerland (UBS) recently announced that it would invest $500 million into Bank of China, and take a 20% stake in Beijing Securities.

Last year, the Hong Kong and Shanghai Banking Corporation (HSBC) took a 19.9% stake in the Bank of Communications.

Citigroup recently announced that it is leading a consortium to purchase a majority stake in the Guangdong Development Bank.


References

http://www.mcafee.cc/Classes/BEM106/Papers/2006/GS.pdf