In a wide ranging conversation, Sanjiv Misra, head of Salomon?s Asian investment banking division and Kenneth Koo, COO, China Investment Banking speak about the China market, the U-shaped recovery and CNOOC.
Q: Can we start by talking about your hiring Kenneth Koo. How important is China to your investment banking business in Asia?
Misra: China is a critically important business for us. It is a business we have not seen so much success in historically as we have in all of our other businesses around Asia. We see this as a huge priority going forward. We?ve seen some staff turnover at the senior levels and we are very focused on rebuilding that effort, and the team at the senior-most levels.
Ken represents a very critical part of that rebuild. He has joined us as chief operating officer for our China investment banking effort. That means that as well as his relationships in China and his execution ability, he will coordinate everything on a day-to-day basis. He will bring together the Citigroup organization in China, to make sure we are selecting the right business opportunities and attacking them systematically.
Q: Ken, Goldman Sachs have had an excellent couple of years in China. What will you bring to the Salomon?s franchise to try and emulate that?
Koo: I know a lot of people say Goldman is the gold-plated Mercedes now. But I came across to Goldman in 1994. It was a bad year for Goldman. It was just building up, and since then Goldman?s China effort has gone through a number of changes. I saw all those strategic issues evolve. I thus have a feel for what works, what doesn?t and what the issues are ? and how you go after business in China. What was key for Goldman was getting the China Mobile deal.
And I think we are in a position to get there too. I feel quite excited about that. I?ve been here now a few weeks, and talked to people internally and externally. There is an amazing Citibank platform, and I see huge potential for that in China. I bring the teamwork element from Goldman, and if Sanjiv didn?t have that orientation too, he wouldn?t have brought me over.
Misra: When you look at the China terrain there isn?t anyone who?s been there forever. There?s no one ? with the possible exception of Goldman ? that even has a three-year track record of successful deals from China. We don?t see any reason why we won?t figure out the formula for building such a track record in China. You learn from your mistakes and we think we have.
Koo: China is getting increasingly sophisticated ? from the policymakers down to the decision-makers in the enterprises themselves. That?s not to say it?s a totally transparent system. But compared to four or five or years ago there are many people who are much more sophisticated. That helps us. It?s when everyone doesn?t know much that they go to the one or two banks that did the latest deals. That was the old China.
Even in some meetings I?ve had already, I?ve been able to say I?m not pushing Salomon or Citigroup. I?m here to talk about what investment banking can do, and what you want. It?s a much more intelligent audience today than it was five years ago. That means they will begin to appreciate what is different about Salomon Smith Barney and what Citibank can bring.
Q: China is still quite unique, isn?t it? You can still send in a big-hitter to win a mandate?
Misra: I?m not sure that isn?t a little exaggerated. Senior people are important in Korea and Taiwan, Singapore and India and a lot of places. It may be a little more important in China. But Citigroup has a broader organization than any other financial services firm on the planet. If you can deal with China in a coordinated manner ? which is what we intend to do ? there is no one who can be more effective.
Koo: Take it as a given that a senior high-profile person can help. Five years ago you could send that guy in with a handshake. The number 50 player could get a deal, and they wouldn?t know the difference. Now for somebody to do that, you have to be there with a China team too. These people have to protect themselves politically. They can?t give someone a deal just because they took them out for dinner. They are now much more worried about being tainted ? if they give it to a firm that is out of the running. You?ve got to be in the running.
Q: It looks like certain clients are ?owned? by certain investment banks like Goldman and Morgan Stanley. Are you looking at the next tier of clients?
Misra: I wouldn?t agree that all of the big clients are spoken for. Based on the discussions we?ve had with such clients, and the follow-up ? it goes again back to Ken?s comment about the sophistication of the clients. If you have something intelligent to say they want to hear more from you. They want a dialogue. Clearly we are also focused on companies that are ? if you will ? the China Mobile?s of tomorrow. But we?re not writing off all the companies that have gone public thus far and saying, because we didn?t take them public is a reason to concede defeat.
Q: Last year was a banner year for earning investment banking fees in China. Is this likely to be repeated, or will 2000 be remembered as a great one-off year?
Misra: Just the deals that have been announced this year would suggest fees of around the same level. So one of the things we find attractive about China is the fact that the opportunities are many, are global in scale, the fees are attractive and candidly, you don?t have to compete on fees in China. Chinese companies are smart enough to see that you get what you pay for. We believe the opportunities will grow over time. I don?t think anyone believes the year 2000 was a one-off, never to be repeated.
Q: How optimistic is Citigroup about the A share market and the ability of the firm to make money there?
Koo: There are lots of discussions about that. Let?s talk about fundamentals first. There is an enormous amount that China needs to do. If you look at how much capital China needs, and the measure of the stock market versus the GDP ? there?s a lot of room to grow. On that measure alone, there?s got to be a lot of capital raising. Then, you ask how much will be cross-border versus domestic equity raising. On the domestic side, China has to make it work.
I am confident they will get there. If you look at Laura Cha going up there ? she had to give up her US passport to become a vice-minister, that?s pretty bold [she will be deputy chairperson of the CSRC]. That?s a definite sign of technocrats having more and more say in that market. There?s still a lot to do. It?s just a question time, however. WTO will open up the domestic market to foreign firms.
Q: What?s your sense of China?s approach to BOCI and CICC? Clearly China wants to create two domestic powerhouses.
Koo: They want their domestic players to be strong. But China won?t sacrifice other benefits for that. China wants technology transfer. China is in a rush, and building up national champions does not happen fast.
Misra: I would not be surprised if a third and fourth domestic player emerges over time. But I agree with Ken. It will happen in parallel.
Q: What percentage of your regional revenues should China account for?
Misra: It?s difficult to answer that on a one-off basis. The nature of our business is quite episodic. There isn?t a continuum of coins dropping on the table. There is a certain cyclicality to businesses. However, I would be disappointed ? once we have our business in place ? if China wasn?t 20-25% of our overall business. I would expect it to be one of the most significant contributors over a three-year cycle.
Q: In the past 10 years, China has had a few boom busts. Is it different this time around?
Misra: If you look at the phases ? China was hot in the early 90s, then you had the red chip craze in 1996-97, and the most recent one. It is only this time that we have seen real solid fundamentals. Previously something was just ?hot? and anybody could get through the window. Now we?re talking about real companies that are global players. They are very focused on governance and value creation. Nobody thought about these things earlier. Now you have foreigners sitting on boards. They are focusing on making the companies look like a ?global? company.
Q: Clearly the failed CNOOC transaction in 1999 did some damage to your China franchise. How are you going about repairing it?
Misra: The best way to avoid mistakes is not repeating them. We?ve all spent a bunch of time thinking through what we could have done differently. We have to be disciplined in the way we target business and disciplined in the way we execute. We have to ensure that the organization is fully coordinated and communicating effectively. We were on a learning curve, and when you are on a learning curve you know less than you might otherwise want to and you make mistakes. We made some mistakes.
Q; What impact will the U-shaped recovery in the US have on the China business?
Koo: It is a question that is percolating in the mind of the Beijing authorities. They are trying to figure out what impact this will have on their pipeline. They?ve asked us, and they?ve invited other folks to go and talk to them.
Q: Is this a time to build relationships, by proving you can get deals done in very difficult conditions?
Misra: We have always found that market downturns lead to big pools of opportunities. In the 1997 crisis we saw an opportunity to step-up aggressively. I ran ECM at the time, and I was probably on the road more when the markets were collapsing. You spend more time in front of clients. One CEO said to me, why are you talking to me now when the markets are dead. I said, that?s exactly why I?m talking to you. It?s time to plan for when they come back.
You can have a much more strategic discussion with clients at this point and take advantage of the fact that other firms are demonstrating they don?t have the same level of commitment.
Q: Are you still hiring, i.e. are you being countercyclical?
Misra: We are looking to hire selectively.
Q: Is China one of those parts of the business where you are looking to hire?
Misra: We hired Willy Liu from JPMorgan to focus on China ECM. Raymond Lee has moved over from running Bank Research to focus on investment banking coverage of Chinese financial institutions. We will probably make a couple of other hires including a senior person to help build relationships in China. We?re in very active conversations on that front.
Koo: Let me go back to CNOOC, because I have to live with that every day. I have not come across a situation, where I have been told we don?t even want to talk to you because of CNOOC. Some don?t mention it, some say it might be an issue in the future. The main thing is I just want to go in and talk to them. My approach is, talk to me about investment banking and I?ll talk to you about investment banking. It?s all about winning their confidence ? letting them see that we know what we?re talking about and CNOOC?s no longer an issue anymore.
The other thing about headcount, is that we can?t emphasize enough the Citibank part of the equation. It is also focused on China, with a head office in Shanghai. They have good people on the ground and they are an extension of us, and we are an extension of them.
Misra: Ken is going to have a meeting tomorrow with a CEO of a very important company in China. Ken will be in there with some very senior people from Citibank. The whole nature of the discussion thus becomes very different than any of our traditional competitors might have in a similar setting.
Q: Around the region, Citi has very strong relationships based on cash management, lending etc. In China that is less true, because of the closed nature of the market?
Koo: Citibank has tremendous brand recognition in China. But it?s a fair point about the corporate banking side. But a number of clients have said ?You guys are a superpower financial house? we need to have a relationship with you. So even if we can?t lend Chinese companies money directly, there are other conversations that are happening on the cash management level etc, to establish a relationship. So, yes, it?s not like Taiwan, which has been making lots of money for the corporate bank for a while. But there is huge recognition.
Misra: Next year is the centenary for Citibank in China. How many foreign institutions have been in China for 100 years?á