In December 2007 new guidelines regulating foreign investment in the Chinese securities market were made public, and the Credit Suisse approval is the first approval under those new rules. The new joint venture, which has not yet been named, will have an underwriting license but no brokerage license. Credit Suisse will own 33.3% of the venture, while Founder Securities owns the balance.
As the A-share market has boomed in terms of market cap and trading volume, it has become all the more desirable for foreign investment banks to have an onshore presence, either via a direct stake (capped at 20%) or via a JV (capped at 33.3%).
Citi signed a memorandum of understanding with Zhongyuan Securities earlier this year, as did Morgan Stanley with Huaxin Securities. But approvals are still pending and mainland press reports suggest that the Chinese partners do not fit the new criteria set by the CSRC in December 2007. The criteria allow only relatively large domestic securities houses on the market, thus preventing foreign investors from snapping up the smaller players to get licenses.
It was hoped the new regulations would permit quicker access to ChinaÆs capital markets, but the new rules have had less effect than expected. For example, the ability to buy listed shares (up to 20%) in local securities companies is not attractive to foreign investors, who believe domestic share prices are inflated. The December regulations also did not initially reverse the rule that excludes foreign investors from the lucrative domestic brokerage and derivatives business.
Caijing, a respected mainland publication, has written that updates to the law in January and February this year permit the obtaining of a brokerage license through M&A by foreign-invested entities. However, this does not appear to have happened so far.
Some foreign banks received special dispensation for setting up joint ventures prior to 2007. The Goldman Sachs JV in China has exposure to the brokerage business via the Chinese parent, Gao Hua Securities, while handling the underwriting itself. UBS Securities obtained both a brokerage and an underwriting license. CICC, the first-ever investment banking joint venture in China between Morgan Stanley and China Construction Bank, also has both, but these days Morgan Stanley has little management input to the JV.
In what was seen as a protectionist move in some quarters, further JV approvals were suspended in 2007.
Founder Securities is a subsidiary of Founder Group, which was set up in the early 1980s with close links to Peking University. Founder Group is a Hong Kong-listed holding company invested in a wide range of businesses, including personal computers. Founder Securities merged with its subsidiary Sun Securities earlier this year. Following the merger, Founder Securities has 78 branches.
According to a Credit Suisse spokesperson, Founder Securities will focus on retail and institutional brokerage, while the joint venture will focus on underwriting.
Lei Jie, currently the chairman of Founder Securities and a 15-year veteran of the securities industry, will move over to take on the chairmanship of the joint venture. The CEO of the joint venture will come from Credit Suisse in the form of Neil Ge, who is currently a managing director at the Credit Suisse investment banking representative office in Shanghai. He will relocate to Beijing to help with the JV.
Wei Xin, chairman of Founder Group, highlighted the advantages of having access to a global investment banking platform. ôI am convinced that excellent opportunities lie ahead for the joint venture. Chinese clients are increasingly demanding more sophisticated financial solutions as well as access to a truly global platform for specialised financial services and products. Many Chinese corporations and individuals are expanding their businesses across the globe and there is a growing demand for leading financial institutions to support these efforts,ö he is quoted as saying in the press release issued on Saturday.
Paul Calello, CEO of Credit Suisse investment banking, adds: ôWe are very pleased with this latest development in our commitment to the Chinese market. Founder has strong local knowledge; Credit Suisse has strong international capability. It is a compelling combination."
Founder Securities ranked 19th in China amongst 151 securities houses in terms of trading volume in 2007, according to the Securities Association of China, and 23rd in terms of underwriting volume.
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