Citi has received preliminary regulatory approval to set up a securities joint venture in China with Orient Securities, a Citi spokesperson confirmed late last night. The entity, which will be named Citi Orient Securities, will still need to apply for a business licence to start operations — a process that is viewed as a formality but normally takes another six months to complete.
If all goes smoothly, the JV should be able to start underwriting and sponsoring primary equity and bond issues in China’s domestic market by the middle of this year. Once the final approval is in place, Citi will be the ninth international firm to gain direct access to China’s domestic capital markets after Goldman Sachs, UBS, Credit Suisse, Deutsche Bank, CLSA, Royal Bank of Scotland, Morgan Stanley and J.P. Morgan. No other international banks are awaiting approval to set up a joint venture at the moment.
Although foreign firms have found it difficult to compete — and make money — in China’s domestic markets, all agree that the access to this market is important for their China franchises. For one, they say it is easier to win mandates for Chinese equity issues in the international markets if they can approach a company offering to work with it both in China and abroad. This has become increasingly important as many large companies seek a dual listing in Hong Kong and Shanghai.
When Citi and Orient Securities agreed to form the joint venture in June last year, a Citi banker called it “the missing piece of the China jigsaw for Citi” and Stephen Bird, Citi’s Asia-Pacific CEO, who sources say has been a key driving force in the team behind the JV, refers to China as a priority market for the bank.
Despite the decline in the volume of new issuance in 2011 (which was no different to any other market globally), A-share issuance in Shanghai and Shenzhen is expected to continue to grow as Chinese companies seek to fund their growth. This is particularly true in light of the restrictions imposed on bank lending.
According to Dealogic data, total A-share issuance amounted to $55.6 billion last year, which was down from $108.8 billion in 2010 but more than twice the $20.9 billion raised in 2006. During the past two years, A-share issuance has accounted for about 60% of the total Chinese ECM activity, including that taking place in international markets such as Hong Kong.
Orient Securities will have a 66.7% stake in the new entity. Citigroup Global Markets Asia will own the remaining 33.3%, which is the maximum permitted shareholding for a foreign entity in China at the moment. The JV will be based in Shanghai.
In addition to the investment banking business under the JV, Orient Securities and Citi have said that they will also explore cooperation in other areas such as research and training.
Orient Securities was founded in 1998 and has more than 3,100 employees. Its shareholders include a number of large state-owned and listed companies. It is involved in securities underwriting, proprietary trading, brokerage, investment and financial advisory, mergers and acquisitions, as well as fund and asset management. Its investment banking business has grown rapidly in the past three years and when the JV agreement was signed in June last year, Citi’s China CEO, Andrew Au, referred to it as “a strong, highly reputable local firm that shares Citi’s management philosophy on building for success”.
Citi already has a strong corporate and consumer bank in China that serves multinational and local companies, institutional clients, Chinese residents and foreign nationals in 13 cities nationwide. The opening of a branch in Wuxi in November brought its total number of consumer outlets in China to 45.
On the investment banking side, last year Citi worked on the $1.2 billion Hong Kong IPO for Chinese hypermarket operator SunArt Retail Group and on Qihoo 360 Technology’s popular $175 million IPO in the US. It was also a joint global coordinator for Haitong Securities’ $1.5 billion IPO that was postponed in December amid volatile markets and competition from several other large-cap deals.