Deutsche Bank securities JV gets China approval

Deutsche Bank announced yesterday that its joint securities venture with Shanxi Securities has received a business license from the Chinese regulators, meaning it is now free to launch investment banking services targeted at the domestic Chinese market. The license was granted about six months to the day after the two firms got the approval to set up the JV and makes Deutsche the fifth international bank to gain access to China's equity and bond markets after CLSA, Goldman Sachs, UBS and Credit Suisse.

In accordance with the prevailing Chinese regulations, Deutsche owns 33.3% of the Beijing-based JV -- named Zhong De Securities -- while Shanxi Securities owns the remaining 66.7%. The business license allows Zhong De to underwrite and sponsor Chinese A-share issues, as well as government and corporate bonds, but not to conduct brokerage operations. It is believed that the new firm will initially focus on large-scale equity issues, but in the longer term it is likely that Zhong De will want to take advantage of Deutsche's expertise in the international bond markets and get more involved in China's rapidly growing corporate bond market as well.

Stock broking is one of the most profitable areas of the securities business in China, but new regulations issued in December 2007 stipulate that Sino-foreign securities JVs will have to wait five years after their establishment to obtain an A-share brokerage license.

Deutsche Bank's head of China corporate finance, Charles Wang, has been appointed CEO of the JV, while Shanxi Securities' president, Wei Hou, will become chairman. Wang is an experienced investment banker who has been with Deutsche bank for three years. Before that he spent 12 years with Merrill Lynch. During his career he has focused primarily on equity and advisory, which reinforces the suggestion that Zhong De's initial focus will be on A-shares.

Deutsche will nominate three members to Zhong De's nine-person board of directors, including Wang and one independent director. Shanxi Securities will nominate the other six, which will include the chairman and two independent directors.

While current Chinese regulations caps the investment by foreign banks in a Sino-foreign securities JV at 33% and direct stakes in a securities firm at 20%, the international banks are all striving to get as much management influence as possible. While abiding by the ownership rules, Goldman Sachs and UBS both have effective operational control over their China businesses. However, both these firms received a special dispensation because they got involved in securities firms that were distressed and it is widely believed that Beijing will not allow more similar set-ups under the existing regulations.

Deutsche Bank didn't comment on the level of management influence it expects to have, but a source said that as CEO Wang will be responsible for appointing most of Zhong De's senior managers. Meanwhile, Shanxi Securities will appoint the chairman of the supervisory board.

"Zhong De Securities combines unique strengths from both of its shareholders," Wang said in a written statement. "We have the personnel, experience, infrastructure and ambition to become a leading firm within China's domestic financial services market."

Zhong De gets the go-ahead just as China is re-opening its A-share IPO market, which was suspended in September in light of the financial market turmoil, which saw both Chinese and international equity markets tumble. In late June, Guilin Sanjin Pharmaceutical became the first company to receive approval for an initial public offering after the sharp rise in Chinese share prices this year had indicated that the market would be able to absorb new issues. However, the regulators have been allowing smaller companies to go public first, no doubt to test the waters. Guilin Sanjin, a manufacturer of traditional Chinese medicine, sold Rmb910.8 million ($133 million) worth of shares, or 44% more than it initially planned, after the offering ended up heavily oversubscribed. The deal was arranged by China Merchants Securities.

According to media reports, another three companies have also received approval for A-share IPOs so far, including Hong Kong-listed Sichuan Expressway.

Deutsche Bank is the second international bank to get approval for a Sino-foreign securities JV since a moratorium on such JVs was lifted in May 2007 and since the new regulations were announced in December 2007. A JV between Credit Suisse and Founder Securities received its final business license in January this year and has been underwriting a few corporate bond issues since then.

Goldman Sachs and UBS were both allowed to set up businesses in China before the new rules took effect, in 2006 and 2007 respectively, but chose different routes to do so -- Goldman through a joint venture with Gao Hua Securities and UBS through its direct 20% stake in Beijing Securities.

Meanwhile, CLSA has a JV with Hunan-based Fortune Securities under the name of China Euro Securities (CESL), which was set up in 2003 under regulations that were introduced as a result of China's entry into the World Trade Organisation in 2002. Pursuant to the five-year rule, CESL was granted a brokerage license for the Yangtze River Delta area in June last year in addition to its underwriting license and the firm is now focusing primarily on the brokerage business.

The only other international investment bank to have direct exposure to China's domestic market is Morgan Stanley, which set up the very first JV (China International Capital Corp) together with China Construction Bank in 1995. This "pilot" programme turned out to be a one-off at the time though and no further approvals were granted until after China's WTO entry. Today, Morgan Stanley has no management input into the JV, but receives revenues in proportion to its 33% stake.

Morgan Stanley signed a memorandum of understanding with Huaxin Securities in early 2008 to establish a JV where it would be more actively involved, but this is still awaiting regulatory approval. Another firm waiting for approvals is Citi, which signed a MoU for a securities JV with Zhongyuan Securities around the same time in early 2008.

For Deutsche Bank, this license means that it is now able to offer all of its core global businesses in China as well. The German bank has made significant investments in China over the past 18 months and currently has a 30% stake in Harvest Asset Management and a 13.7% stake in Hua Xia Bank. It also has a derivatives license and is locally incorporated in Beijing, which means it can roll out a branch network should it decide to do so.

Shanxi Securities was founded in 1988 among the first group of securities firms to be set up in China. According to a statement in January, when the approval for the JV was received, it has more than 53 branches in Shanxi province and other major cities, including Beijing, Shanghai and Shenzhen. At that time, it had 800 employees.