Macquarie signs JV agreement with Chinese securities firm

Macquarie Group has made a significant push to broaden its presence in China over the past week, showing that the Australian bank intends to capture part of the business as China continues to open its domestic markets to foreign banks.

On Thursday last week, Macquarie announced that it has set up a trust company joint venture in China together with Beijing Sanjili Energy Company and Beijing Rongda Investment, that will allow it to offer renminbi-denominated products to Chinese high-net-worth investors and institutions and to help companies and local governments to raise domestic debt and equity financing, for example through structured products. And on Friday, The Sydney Morning Herald reported that the bank had also signed an agreement to set up a securities joint venture with Hengtai Securities, which will give it access to China's coveted primary A-share market by enabling it to underwrite Chinese debt and equity issues. However, the JV is unlikely to be operational until the second quarter next year, at the earliest, as it still needs several approvals by the Chinese regulators.

The push to get a role in China's domestic markets comes after Macquarie has significantly increased its involvement with regard to initial public offerings of Chinese companies in Hong Kong. Last year, the firm was a joint bookrunner on both the dual A- and H-share listings (for China Railway Construction Corp and China South Locomotive & Rolling Stock) as well as several others deal. And this year, it helped arrange last month's hugely popular offering for BBMG, among others.

The securities JV, which was confirmed by sources at the Australian bank, will see Macquarie embark on a similar path as Credit Suisse and Deutsche Bank, which have both launched securities JVs in China this year after receiving the final approvals in January and July respectively. Macquarie plans to submit the relevant applications to the Chinese Securities Regulatory Commission next week and expects to receive the first round of approvals within six months. The plan is for the JV to be fully operational by the second quarter of 2010.

Like Credit Suisse and Deutsche, Macquarie will hold one-third of the JV, which is the maximum allowed for a foreign bank under current regulations, while Hengtai will own the remainder. Hengtai is registered in Inner Mongolia, but is effectively controlled by a Beijing district government vehicle.  

Goldman Sachs and UBS also have exposure to China's domestic debt and equity markets; Goldman through a joint venture with Gao Hua Securities and UBS through a direct 20% stake in Beijing Securities. These started operations in 2006 and 2007 respectively, after receiving special dispensation because they got involved in securities firms that were distressed.

A Sino-foreign securities JV is allowed to underwrite and sponsor Chinese A-share issues, as well as government and corporate bonds, but not to conduct brokerage operations. Stock broking is one of the most profitable areas of the securities business in China, but under new regulations issued in December 2007, Sino-foreign securities JVs will have to wait five years after their establishment to obtain an A-share brokerage license. Among the foreign securities firms and investment banks operating in China, only CLSA, through its JV with Hunan-based Fortune Securities -- China Euro Securities (CESL) -- which was established in 2003, has the right to do that as of now. Pursuant to the five-year rule, CESL was granted a brokerage license for the Yangtze River Delta area in June last year in addition to its underwriting license and the firm is now focusing primarily on the brokerage business.

Morgan Stanley, which has revenue exposure to the domestic Chinese market through its 33% stake in China International Corp, signed a memorandum of understanding with Huaxin Securities in early 2008 to establish a JV where it would be more actively involved, but this is still awaiting regulatory approval. Also awaiting approval is Citi, which signed a MoU for a securities JV with Zhongyuan Securities around the same time in early 2008.

Meanwhile, Macquarie will take a 19.9% stake in the joint trust company with Sanjili and Rongda, which are both controlled by several state-owned companies, including State Development and Investment Company (SDIC), which according to a Macquarie release is one of China's largest investment holding companies. Sanjili will own 60% and Rongda the remaining 20.01%. The JV, which will have an initial capital base of Rmb300 million, will be called Sino-Australian International Trust Company (SATC), will be headquartered in Shanghai and will be jointly managed by the three partners. It is classified as a non-banking financial company and has already received all necessary government and regulatory approvals.

Sanjili chairman Yu Jian Ping said in a written comment that he sees a fantastic opportunity for the trust company JV, given China's significant and swelling local currency savings pool. In 2008, China's household savings reached an estimated Rmb20 trillion ($3 trillion), or 72.5% of China's 2008 GDP, after growing by more than 20% between 2007 and 2008.

"This joint venture will allow us to extend our client service capability as we build a domestic distribution network and to arrange financing for international clients operating in China and locally based corporates," added Andrew Low, head of Macquarie Capital Asia.

In addition to these two JVs, Macquarie early last week also agreed to set up a separate asset management JV with the China Everbright Group that will aim to raise $1.5 billion for two China-focused infrastructure funds. Once all three of these initiatives are up and running, Macquarie will essentially be able to do all of the same businesses in China as it does in its home market in Australia and in the rest of Asia.