China ends ban on foreign-invested securities firms

The news gives new hope to international investment banks keen to keep up with first-mover Goldman Sachs.
The news on Wednesday that China will end a ban on new foreign securities firms and resume the issuance of licenses to securities companies, including joint ventures, is set to spark renewed activity by international investment banks that are fighting for a position in the lucrative Mainland market.

An announcement issued following this weekÆs meeting between US treasury secretary Henry Paulson and Chinese vice premier Wu Yi said new licenses may be issued from July onwards but contained few other details. The moratorium on foreign securities firms had been expected to be lifted in August, but until now there had been no official word from Beijing whether that would be the case.

Industry observers say it appears the 33% cap on foreign ownership of such JVs or of domestic securities firms will remain in place and that applications for joint ventures between international investment banks and domestic brokerages will continue to be reviewed on a case-by-case basis.

Still, the fact that it will now at least be possible to start negotiations with the regulators again will be welcomed by the likes of Citi, Credit Suisse, Deutsche Bank, JPMorgan, Merrill Lynch and Morgan Stanley, who are all keen to be able to underwrite equity issues in the rapidly growing A-share market.

At present, Goldman Sachs and UBS are the only two international investment banks that are allowed to do this and, so far, Goldman is the only one that has actually led an A-share deal as UBS Securities û the JV between UBS and Beijing Securities - received its underwriting license only three months ago.

Morgan Stanley is present in the A-share market through its 34% stake in China International and Capital Corporation (CICC), but although it was a co-founder of the Chinese investment bank back in 1995, it has long since given up any operational influence. Similarly, CLSA is involved through a minority stake in China Euro Securities JV, but doesnÆt have control.

Banks are worried that they will be left behind if they donÆt get the infrastructure in place soon, especially in light of the flood of high-profile initial public offerings since China lifted its ban on new listings 12 months ago and the fact that both Goldman and UBS are lining up A-share mandates.

Representatives at other banks were reluctant to comment on the news yesterday, noting that the issue will be getting more sensitive as the regulators resume their review of applicants. Morgan Stanley did, however, issue a statement by Asia CEO, Hans Schuettler, welcoming the news.

ôWe welcome the further opening of ChinaÆs financial sector and look forward to additional details regarding the new policy. This reflects the government's commitment to develop a more efficient and stronger domestic capital market,ö he says. ôWe also believe having foreign participants in the domestic market will help raise standards and build a world-class securities industry for the country.ö

The pressure on foreign investment banks has heated up after Goldman and UBS were both able to get around the current ownership rules and ensure that they have operational control of their respective China businesses. Until those two deals, some international investment banks had been biding their time, waiting for China to allow foreign banks to take a controlling stake in securities joint ventures.

ôEven a year ago people seemed to think that the first mover advantage wasnÆt that great as you could be building up your infrastructure against little or no return and then risk having everybody else come in a poach your people when the market opens up a few years down the road,ö says one banking source. ôBut the deals are coming through quicker than expected and now the view seems to be that if you are not there in three years time you will have some problems.ö

According to industry sources, a number of investment banks have already identified potential partners to work with in China and will be ready to submit their applications as soon as Beijing is willing to accept them. Some banks are also believed to have filed applications before the moratorium was introduced in September last year. These are believed to include Merrill Lynch, which signed a non-binding memorandum of understanding with Huaan Securities to set up an investment banking JV in January 2005.

Greater access for US firms to ChinaÆs financial services markets has become a key part of WashingtonÆs China policy since Paulson, a former chief executive of Goldman Sachs, took over as treasury secretary in June last year.

At this weekÆs meeting, China also agreed to allow foreign securities joint ventures to expand their activities in the Mainland to include brokerage, proprietary trading and fund management, and to allow foreign-invested banks to offer own brand, yuan-denominated credit and debit cards, according to a statement on the US treasury department website.

Beijing also agreed to increase the total quota for Qualified Foreign Institutional Investors to $30 billion from $10 billion, giving international investors greater access to ChinaÆs rapidly growing equity markets, which are the best performers in Asia so far this year.

Among other issues, both sides also committed to liberalising air services rights, which will open for a doubling of daily passenger flights from the United States to China by 2012.
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