ItÆs the second time CLSA has trumped its peers, since CESL was also the first joint venture set up in 2003 under regulations that were introduced as a result of China's entry into the World Trade Organisation in 2002. At that time, CESL was granted licenses to underwrite A- and B-share issuance and local bond offerings. (Morgan Stanley also set up a JV, China International Capital Corporation, together with China Construction Bank in 1995, but that was a one-off).
The news comes after Credit Suisse announced on Saturday that the Swiss bankÆs JV with Founder Securities has obtained an underwriting license, but not a brokerage license, also under the new regulations. UBS Securities is the only other Sino-foreign venture which has a brokerage license and an underwriting license.
CESL also received a "securities investment consultancy license" which enables the JV to produce and distribute Chinese language research and to issue investment advice to investors in China, according to the press release.
Brokerage is undoubtedly the sweet spot in the China securities market and local players now have to deal with a company which is an out-and-out broker with a reputation for excellent research and execution.
ôThis plays to our core strength in brokerage,ö says CG Wu, CLSAÆs China chairman. In contrast, the performance of the firm's China underwriting team has been less good. CESL does not appear among the top 20 firms based on underwriting dollar value for either A-shares, H-shares, or the combined categories for the 12 months to May 2008, according to figures from Dealogic.
CLSA won the brokerage license by conforming to the rules that China Securities Regulatory Commission (CSRC) drew up in December 2007, one of which stipulated that any Sino-foreign joint venture would be able to "expand its business after five years". CESL was set up in 2003.
However, Wu says it wasnÆt clear what form this expansion would take until a solution was reached through lengthy negotiations with the CSRC. Sources say the CSRC should be praised for permitting the establishment of a first-class brokerage firm to compete against the often inefficient domestic players.
CESL potentially has a certain amount of overlap with its Chinese parent, Fortune Securities, which runs a retail brokerage network. However, Fortune Securities will not be permitted to open any branches in the Yangtze Delta area.
Even if it did, there would not likely be any competition. CESL has only one branch, in Shanghai, and will therefore be concentrating on the institutional brokerage side only.
Like most developing markets, the majority of ChinaÆs trading volume comes from day-trading retail investors. The sums they throw off in commission revenue are considerable, amounting to $20 billion in 2007, according to the CLSA press release. Underwriting revenue was tiny compared to that, amounting to just $1.3 billion. Institutional investors also contribute to that total, but their share is much smaller. However, their share is growing as China builds up a base of institutional investors such as pension and insurance companies.
ôThe CLSA structure is clear and uncomplicated,ö says Wu. Indeed, most other joint ventures are limited to doing the underwriting, while the Chinese parent keeps a lock on the much more lucrative brokerage license û and learns about underwriting in the process.
The Goldman Sachs joint venture, Goldman Sachs Gao Hua Securities, also focuses on underwriting while the Chinese parent, Gao Hua Securities, looks after sales and trading. Only UBS Securities has both an underwriting and a brokerage license, but this is not a JV. UBS acquired the licenses after it took over the management of loss-making Beijing Securities in 2006. UBS has a 20% direct stake in the brokerage, but has management control.
Ironically, foreign companies are being allowed into China just as the A-share market is tanking. The Shanghai A-share index has collapsed from 5,800 points at the beginning of this year to 3,000 currently.LL
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