Looking out over the desolate capital markets investment landscape in China, it's not hard to understand the latest craze sweeping China.
The stock market has been tanking for the last 18 months, the corporate bond market is developing with glacier-like slowness, and interest rates are at record lows.
The hope is that Financial Holding Companies, the words on everybody's lips, will boost profits though cross selling, economies of scale and diversifying revenue.
Ever since the restructuring of China International Trust and Investment Corporation (CITIC) into a holding company combining its industrial and financial business, companies have been tugging at the leash to do something similar. Manufacturers want to be the next General Electric, which changed from a manufacturing company to a financial services provider, while the finance houses want to be the next Citigroup.
The significance of a holding company combining insurance, securities and commercial banking is that it enables businessmen to combine several traditionally lucrative finance areas via the holding company.
Financial institutions are currently not allowed to invest directly in each other. That is because of the excesses that occurred during the bubble of the late 1980s and early 1990s.
Having a holding company is a big step to reversing those restrictions.
But it presents a problem to the government, which has never had to legislate for financial holding companies before. Until now, banks, securities houses and insurance companies have also all had their own regulator. There is no overarching regulator which could oversee the holding company.
Many in authority are concerned that assets could be diverted from their rightful owners, that systemic risks could spread through the whole edifice, and that the holding company structure could make an IPO more difficult, since it consolidates information to an unhelpful degree.
CITIC was the first company to get official approval. But that does not mean holding companies will be granted to everybody, however much certain companies have raised their hopes. CITIC is unique in that it was founded some twenty years ago to be China's window onto the West, just as China began to open up in 1979, and benefits from rock-solid state support.
That support translates into 20 years of government mismanagement and spiraling bad loans that need to be sorted out, say cynics, by re-focusing on the hopefully profitable financial markets.
Still, the CITIC's restructuring has triggered a flurry of imitations. Ping An Insurance has acquired a securities house, while China Merchants Bank has acquired a securities house and insurance company. Everbright Bank also has the components for full array of banking services. Industrial conglomerates such as white goods maker Haier and the Far Eastern Group have also started to assemble the components of a financial services group.
However, none of these companies, although most likely de facto holding companies have been formally approved.
Bank of China has set up a true FHC but by cheating. The core of the FHC is Bank of China (HK), which was set up last year, and which gets around mainland rules since it counts as a foreign entity. The largest bank in China, ICBC, has done something similar with Hong Kong-based investement bank ICEA.
Yet the holding companies, if any, will still be a long way from the likes of HSBC and Citigroup which effortlessly pool information and cross sell numerous products to their wealthy customers.
Says one senior economist at a Chinese brokerage, "The holding companies, if approved, will not be able to act like Citibank or HSBC in the sense of being a full service financial group, for example cross-selling fund management products to commercial banking customers or the commercial bank providing financing to the investment banking customer. "
"The government is very concerned about systemic risk," he adds, "so pooling of systems and information will most probably not be on the agenda. The one advantage would be diversifications - compensating for a bad securities market with the steady premium flows from the insurance business."
Another reason for companies wanting to get into the financial markets is the M&A market in China, or lack of it.
"Companies have nothing to lose by setting up FHCs. After all, they do not actually need to buy up insurance companies or whatever finance company they need - they just get it transferred administratively, or invite a company to join," says the economist.
That is especially the case if companies are state owned, like CITIC, or have state connections, like China Merchants Bank, which was originally founded by the ministry of transport.
Yet foreign observers are quick to warn about the scandals that have disgraced leading western institutions in the wake of the setting up integrated financial services group.
The irony is that the US is reconsidering the role of integrated service providers, just as China seems to be rushing toward them.
"If you accept that companies in developed countries are much better regulated than in China, yet saw some devastating scandals, it is scary to think what could happen in China," says CLSA China Country Head Andy Rothman.
Rothman believes that it makes more sense to clean up the different financial sectors one by one, rather than lump several undeveloped sectors into one.
"There are important conditions to healthy capital markets, such as deregulated interest rates, effective supervision, sound accounting practices and solid corporate profitability. China would be better off resolving these fundamental issues first," he comments.
While Chinese bankers are swayed by the example of FHCs being set up in Taiwan, and the likes of such global giants as Citigroup, Stephen Green, head of the Asia Programme at the Royal Institute of International Affairs in London, does not believe China is ready for them.
"The advantages of FHCs are leveraging the brand, risk diversification and cross selling," he says, "but with the current underdeveloped state of the markets in China, they are limits to the benefits they can bring."
The benefits of an FHC accrue when companies can cross-sell two existing products, which are ideally leaders in their fields. That is usually because because competition in the existing fields has become very intense, and cross-selling gives an edge in terms of convenience, cost and brand leverage.
Yet most Chinese institutions are far from having excellent products and need to focus hard on producing them. The amount of products, and hence consumer choice, also needs to increase. For example, China has just 50 investment funds, compared to 8000 in the US, Green points out.
A conglomerate like GE thinks above all else "can we be the best in this sector", and only second "what form of corporate structure do we want and how big do we want to be?" he argues.
So far, the government response has been muted. In fact, it seems to be playing catch up. That often happens in China. Companies press boldly ahead with new ventures and the government scrambles to legislate some order into the resulting chaos.
What is for sure is that the government is unlikely to go ahead with measures that raise systemic risk.Even if measures are passed to allow some form of FHCs, they are sure to be ringed with provisions against abuse. So it is important Chinese companies do not spend excessive time and effort chasing this non-existent panacea.
