China's closest thing to a private brokerage was approved by the financial regulator last week, when the CSRC gave two approvals. The first was for the setting up of a brokerage, Gaohua. The second concerned a joint venture investment bank Goldman Sachs will set up with Gaohua.
The former eventually hopes to buy out the latter once foreign investors are allowed to own majority stakes in domestic brokerage operations. However, the current regulations have led to a complicated shareholding structure, details of which are starting to emerge in the mainland press.
Gaohua will be 25% owned by computer manufacturer and IT heavyweight Lenovo (formerly known as Legend) and 25% each by three venture capital companies. All shares in the three investment companies are held by natural persons - individuals rather than state-owned companies.
All three were also set up on the same day in October last year, and are owned by close allies of Fang Fenglei, the man facilitating Goldman's entry into the A-share market. Fang has a 60% share in one of the three companies, Beijing Houfeng Investment Company. He is a former vice-CEO of CICC, the JV between China Construction Bank and Morgan Stanley.
According to mainland media reports, Fang has picked his fellow-investees carefully. One of the companies, Beijing Dexiang, is 60% owned by Cha Xiangyang.
Cha was executive director of the investment banking division of ICEA, a Hong Kong-based joint venture investment bank between the Industrial and Commercial Bank of China and Hong Kong's locally-grown Bank of East Asia. Cha also served under Fang, who was CEO of ICEA from early 2002 to the summer of 2003.
The remaining 40% of Dexiang is owned by Ms Xu Jie, who is currently working as Fang's secretary.
The ownership of the third investment company has not yet been revealed.
The participation of Lenovo is reportedly the brain child of Liu Chuanzhi, the founding force of Legend and one of Goldman's key banking clients on the mainland. Now semi-retired, Liu is said to have long harboured ambitions to transform the company into comprehensive financial investment company, covering the whole spectrum of financial services. Lenovo's traditional business of making personal computers has been languishing under the assault of US PC makers, and the company is keen to diversify.
Lenovo was involved with efforts to salvage Hainan Securities, but ultimately decided it had not acquired sufficient expertise. Goldman bailed out the securities company to the tune of $60 million in return for the chance to work with Gaohua. Fang Fenglei also previously worked at Hainan Securities.
Observers say Liu believes the opportunity to work alongside one of China's scarce investment banking talent (Fang, has lead every one of the mainland's investment banking ventures) and one of the world's most famous investment banks, represents one of the best ways to gain unbeatable financial markets experience.
The entry of Gaohua as a quasi-private player to China's devastated financial markets is significant.
China's securities houses scene is dominated by state-invested ventures. This is partly because provincial government are always quick to muscle in on profitable ventures and partly because the capital markets offer a good platform to finance their local state-owned enterprises.
Fang and Goldman must be hoping the only way now is up given the domestic stock market is currently in free fall (reaching a five year low last week) and local houses are constantly in trouble over fraud, theft and insider staging.
Gaohua's approval may also show the government believes the market can be given a new lease of life and professional underpinning if it brings in private money and foreign expertise.
The synergies are obvious: Gaohua will carry out brokerage, historically quite profitable in China, but off-limits to foreigners, while passing on IPO mandates to the JV investment bank.
Once Goldman receives permission to buy out Fang and his allies it will have a brokerage and, by extension, the investment bank. Other foreign investors do not have a similar option with their JV partners.
They will have to maintain their partner or set up a new unit from scratch. They may indeed be in competition with the Chinese parent of their joint venture. By avoiding these problems, Goldman has discovered an elegant solution to China's regulatory hurdles.
There is big caveat to this scenario. The securities industry is more protected than fund management and insurance. China has merely pledged itself to allow one-third foreign participation in the securities JV within three years of WTO accession.
China has stuck to that promise but it is not clear when Goldman will be able to exercise its call option. No regulation currently provides a more generous timetable regarding an opening of the market than this pledge.
Goldman provided the $100 million loan for Fang and his allies to set up the investment bank. Such a large commercial loan from a foreign entity to a private individual is reportedly a first in China.
So far, only two Sino-foreign securities joint ventures have been established in China - one between Xiangcai Securities and CLSA and another between Changjiang Securities and BNP Paribas. Both the European companies hold 33% stakes in their joint ventures.