CLSA announced this week that it has applied to the CSRC (China Securities Regulatory Commission) to establish a joint venture securites company with China's Xiangcai Securities. The new company will be known as China Euro Capital and represents the first time a European investment bank has joined forces with a Chinese firm to offer a full range of banking services on the Mainland, including public offerings, underwriting and advisory work.
"Our proposed joint venture with Xiangcai is ideally placed to capitalize on China's accession to the World Trade Organization," says CLSA Chief Executive Rodney Smyth, who adds that China's markets are entering a phase where State Owned Enterprise consolidation and private sector companies will fuel the rapid expansion of the domestic stock markets.
Xiangcai Securities is unlisted, and has a comprehensive license, meaning that it can carry out proprietary trading as well as brokerage activities. At the end of last year, 23 securities houses out of a total of 101 have such a license. Xiangcai Securities is also engaged in asset managment and has a registered capital of Rmb 10.02 billion . It was established in 1996 and is based in the inland province of Hunan. It has 23 branches and around 900 employees.
The only existing joint venture is CICC (China International Capital Corporation), set up by Morgan Stanley in assocation with China Construction Bank in the mid-1990s. The bulge bracket American firm has a 35% stake. CICC has the privilege, closed to other domestic securities houses, of underwriting shares issued in Hong Kong as well as domestically.
Following China's entry to the WTO in the second half of next year, foreign securities houses will be allowed to take a 33% stake in a domestic securities house. The stake can take the form of JV, either through converting the existing company into a JV by selling an interest to the foreign company, or by jointly investing in a new venture.
Setting up a new joint venture is generally viewed as being better for foreign investors as they avoid the problem of buying into a cloudy balance sheet and hidden liabilities, say analysts. Very few domestic securities companies are listed, and this makes them harder to value.
However, the regulations still have many grey areas. Where domestic asset management companies are concerned, for example, foreign companies will be able to take a 49% stake after three years. However, since the WTO protocol on this area has not yet been released, it is unclear what will happen if a foreign company buys a domestic securities house which operates in both areas.
One possibility is that a JV will be set up to cover either asset management or underwriting and brokeage, but not both.
The development of China's stock market forms part of the government's efforts to capitalize and steamline its SOEs. The 101 securities houses make the bulk of their profits from commissions on trading, although since competition is mainly related to price, margins are slipping. Local firms are keen to hook up with foreign expertise in the more lucrative areas of fund and asset management. Asset and fund management should also surge on the back of the government's ongoing efforts to establish a national pension system with defined contributions.
The past few years have seen the government carry out a gigantic programme of converting leading SOEs into share issuing companies listed abroad or internationally. As the number of such companies decreases, the underwriting focus is shifting to meeting the capital needs of China's burgeoning private sector and second tier SOEs which wish to list domestically. There is currently a queue of around 500 companies undergoing restructuring to meet CSRC standards prior to a domestic listing.
