The license is similar to the one obtained by the Credit Suisse joint venture with Founder Securities announced last week, and will enable the joint venture to underwrite domestic shares and bonds, and to trade domestic bonds (but not domestic shares). Share trading, or broking, is one of the most profitable areas of the securities business in China, but joint venture can only obtain the separate brokerage license for A-shares five years after the JV is established û the period which the Credit Suisse and Deutsche joint ventures will have to wait.
So far, only the UBS and CLSA ventures have the brokerage licenses as well as the underwriting license under one roof. The CLSA joint venture, China Euro Securities Limited (CESL), obtained the brokerage license last week because it was founded in 2003. The UBS venture, UBS Securities, obtained the brokerage license as well as the underwriting license by receiving exceptional permission from the regulator. UBS is not a joint venture, since UBS has a direct 20% stake in the company, the International Finance Corporation another 5%, while the rest is held by domestic players.
According to CLSA, the revenue generated by the onshore brokerage market in 2007 amounted to $20 billion, compared to $1.3 billion in underwriting fees.
The A-share market is, however, a huge opportunity for local and domestic players in the wake of efforts by the authorities to list local companies onshore, thereby finally permitting ChinaÆs citizens to buy them. The amount of capital that was raised onshore from June 2007 to May 2008 amounted to $77 billion, compared to $23 billion in Hong Kong (for all share types), according to Dealogic.
The deal shows that Deutsche Bank is accumulating an impressive number of China licenses. Although Deutsche has not been high profile in any single area in China, the bank seems well prepared for the future. It has a 30% stake in Harvest Fund Management, and a 13.7% stake in Hua Xia Bank, a bank with a national license. Deutsche Bank is also locally incorporated, meaning it can roll out a branch network, if it decides to.
Only HSBC comes close to that range of investments in China, with minority investments in Ping An Insurance, Bank of Shanghai and Bank of Communications, as well as having the biggest network among the foreign banks. To be sure, HSBCÆs investments are on a far larger scale than DeutscheÆs. HSBC does not appear to have applied for an onshore underwriting joint venture license û yet.
The spate of joint ventures in the past weeks follows a moratorium on Sino-foreign joint ventures which was lifted in May 2007, thereby bringing China back in line with its 2001 World Trade Organization commitments. New rules hammered out in December last year also permitted foreign investors to take direct minority stakes in Chinese securities firms. Neither Credit Suisse nor Deutsche Bank have opted for that route, but as Jeanette Chan, a partner for Paul, Weiss, Rifkind, Wharton & Garrison in Hong Kong, says: ôThe rules provide extra choice for foreign investors. Different companies have different investment requirements, so the rules do make things easier for foreign investors.ö
Chan adds that sometimes setting up a joint venture means a fresh start, and avoids exposure to hidden liabilities at the Chinese parent company level. The downside is having to build the infrastructure from scratch.
Whatever route they choose, itÆs clear that the lure of ChinaÆs capital markets will result in many new foreign players vying for joint venture licenses.
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