Credit Suisse's securities joint venture in China has won approval to provide brokerage services, becoming only the third firm able to help international investors invest widely in mainland China.
The Swiss bank, which disclosed the news on Thursday, said it would now ramp up operations at Credit Suisse Founder Securities Limited, or CSFS, as a result of the breakthrough. There are currently about 100 people working at the joint venture.
“We’re in growth mode,” Nicole Yuen, vice chairman for Greater China and head of Greater China equities at Credit Suisse, told FinanceAsia in an interview.
Credit Suisse said in October it has earmarked Sfr700 million ($687 million) to invest in Asia Pacific over the next three years.
Also in October, Credit Suisse said it was expanding its equity research capabilities in China, adding headcount to meet growing investor demand for in-depth analysis of the country’s A-share market. In Greater China corporate finance it recently hired Richard Kao from Standard Chartered.
CSFS is poised to expand just as Chinese stock market activity prepares to pickup anew with the likely addition of a Hong Kong trading link to Shenzhen’s stock market, the renminbi’s potential addition to the International Monetary Fund’s Special Drawing Rights currency basket, and the inclusion of A-shares in MSCI’s benchmark emerging market indices.
China's A-share market has now overtaken Japan to be the number two stock market by market capitalisation in the world.
“It is becoming increasingly clear that for any international asset manager, participation in China’s markets is a must,” said Yuen, who placed the first trade for a foreign investor via China’s Qualified Foreign Institutional Investor (QFII) scheme.
Having a mainland securities joint venture Credit Suisse will be able to provide international institutional investors the choice of using the QFII scheme, the Renminbi QFII modified version, or the two-way Stock Connect trading link between the Shanghai and Hong Kong bourses. Stock Connect currently can’t be used for investing in Shenzhen’s stock market or bonds.
Institutional investors prefer to trade with banks they are familiar with and technology platforms that support them, she said. Credit Suisse has the largest equity trading market share on the Hong Kong stock exchange, according to a market source.
CSFS is the first Sino-foreign securities joint venture set up after China rewrote the rules in December 2007 to once again allow foreigners to enter its securities industry.
Established in October 2008, CSFS is 33.3% owned by Credit Suisse, with the remainder held by its partner Founder Securities.
UBS and Goldman Sachs are the only other two foreign investment banks to have brokerage licences in China and their deals came under special circumstances. China's government granted UBS control of bankrupt Beijing Securities in 2006 on the understanding the Swiss bank would pump in money to revive it while Goldman gained control of a joint venture in 2004 via a Byzantine structure spanning two separate entities.
Since the establishment of CSFS, six other Sino-foreign securities joint ventures have been set up including three between Citi and Orient Securities, Morgan Stanley and Huaxin Securities, and JP Morgan and First Capital.
These have had to limit their operations to investment banking activities, such as the sponsoring and underwriting of A-shares, government and corporate bonds. Early on, underwriting deals was relatively lucrative. However as competition intensified it became harder for the joint ventures to win mandates and maintain consistent profitability -- something not helped by the frequent freezing of the IPO market.
CSFS today is the first among the securities joint ventures set up since 2007 to receive approval to expand its business to include securities brokerage.
“We’re joining a very select group of banks,” Yuen said.“There are plenty of opportunities when you have a securities business that straddles the primary and secondary market. That's really when you see the benefits.”
As head of Greater China equities, Yuen is responsible for equities in Hong Kong, onshore China, and Taiwan.
It has not all been smooth sailing for the joint ventures. Several have ended in divorce.
In one high-profile example of how partners in a Chinese securities JV can sometimes go their separate ways, Morgan Stanley set up CICC in 1995 with China Construction Bank but gave up management control in 2000.
Lei Jie, chairman of Founder Securities and CSFS, was also released from police custody earlier this year. However a person familiar with the day-to-day operations of the joint venture said the arrest had had little impact on business.
CSFS's licence from the China Securities regulatory Commission is limited to providing securities brokerage services in Shenzhen Qianhai because under Chinese rules it cannot compete in the same region head-to-head with its joint venture partner Founder Securities.
When Founder Securities teamed up with China Minzu Securities it granted a call option to Credit Suisse to buy them out of the joint venture.
In 2012 Chinese regulators upwardly adjusted the percentage of equity foreign investors could hold in Chinese securities houses, to 49% from 33%. Credit Suisse is in discussions with Founder Securities about the best way to raise its stake to a majority, either by first lifting it to 49% or waiting until the regulatory regime allows it to go beyond 50%, according to people familiar with the matter.
Credit Suisse expects to start offering brokerage services early next year.