The Royal Bank of Scotland looks set to become the first UK bank to be able to underwrite domestic equity and bond offerings in China after earlier this week receiving the approval to set up a securities joint venture with Guolian Securities.
The approval, which was announced during a visit to China by a UK delegation led by prime minister David Cameron, will allow for the two parties to set up a joint business, but to start operations they will still need a business permit, which will typically take another six months. This suggests that RBS may be able to start offering investment banking services in the domestic Chinese market towards the end of the second quarter next year.
RBS is the third international bank to gain approval for a JV since a moratorium on Sino-foreign securities JVs was lifted in May 2007 and following the new regulations announced in December of that same year. Credit Suisse received the final business permit for its JV, named Credit Suisse Founder Securities, in January 2009 and Deutsche Bank got the nod to start operations of its JV, Zhong De Securities, in July last year.
CLSA, Goldman Sachs and UBS also operate in the domestic Chinese market as per various arrangements that were put in place and approved before the new rules took effect, making RBS the sixth international bank to gain direct access to this coveted market, assuming the final approval comes through. This puts the UK bank ahead of major US peers like Bank of America Merrill Lynch, Citi, J.P. Morgan and even Morgan Stanley.
Morgan Stanley set up the very first securities JV (China International Capital Corp) together with China Construction Bank in 1995, but today has no management influence on the business – although it does continue to receive revenues in proportion to its 33% stake. The US bank signed a memorandum of understanding with Huaxin Securities in early 2008 to establish a JV where it can be more actively involved. However, Beijing has made it quite clear that it won’t approve this JV until Morgan Stanley sells its stake in CICC, something which has proved difficult so far.
The approval to set up the JV with Guolian was mentioned in a document outlining the outcome of the Third China-UK Economic and Financial Dialogue and was also announced by UK chancellor George Osborne in his closing press statement at the end of the visit. Both were very brief and basically just noted that the approval had been received. Osborne also noted that RBS chairman Philip Hampton was part of the visiting UK delegation.
Commenting on the news, Hampton noted that the securities joint venture will further enhance the bank’s existing platform in China, which also includes a locally incorporated bank, a leasing company and stakes in both a futures company and a trust company.
"RBS is strongly committed to the long-term development of China’s wholesale and investment banking business,” he said.
The bank declined to comment beyond that, but sources said the JV will have a similar structure to those set up by Credit Suisse and Deutsche Bank with RBS owning one-third (the maximum investment allowed for a foreign bank under Chinese regulations) and Guolian owning the remaining two-thirds. Also, once the final business permit is received, the JV will be allowed to underwrite Chinese A-share offerings and bond issues, but not to conduct brokerage operations. Stockbroking is one of the most profitable areas of the securities business in China, but the December 2007 regulations stipulate that Sino-foreign securities JVs will have to wait five years after their establishment to receive an A-share brokerage licence. If the earlier examples are anything to go by, Guolian’s investment banking business will be transferred to the new JV, while the brokerage business will continue to be operated by Guolian.
The only foreign bank whose domestic China business has an A-share brokerage licence at present is CLSA. Its JV with Hunan-based Fortune Securities was set up in 2003 under the name of China Euro Securities (CESL) and was granted a brokerage licence for the Yangtze River Delta area in June 2008. While it also has an underwriting licence, the firm is now focusing primarily on the brokerage business.
Guolian Securities was set up in September 1992 under the name of Wuxi City Securities Company, but changed its name to Guolian in 2008 following an internal restructuring. According to its Chinese language website, it ranks as a Class A brokerage firm in China and in 2008 and 2009 also obtained an A-rating among the Class A firms. It currently has 28 securities operations across China and more than 870 staff.
During the economic and financial dialogue, China and the UK also committed to strengthening their macroeconomic policy coordination; enhancing cooperation in the financial sector, trade and investment, green development and global economic governance; to promote their economic relations; and to support the global economic recovery.
Other commercial deals included the granting of a qualified foreign institutional investors (QFII) quota to Aberdeen Asset Management and a bancassurance partnership between Standard Life and Bank of China.