US financing techniques in China: Mission Impossible?

Put your money where your mouth is: that is the refrain of China skeptics reluctant to admit that China is serious about reform. And given the Wild West atmosphere so prevalent in Chinaí»s financial markets, it does comes as quite a surprise to discover that that is exactly what Chinaí»s investment banks have been doing. Top securities houses such as Guotai Junan, Guosen, Guotong, Citic Securities and Everbright Securities as well as a smaller number of managers from the nascent fund management industry, have been shelling out $3000 per head for a five day course in corporate finance techniques. í¦We didní»t market the course as í«advancedí», even though they are by mainland standards. Rather, we stressed that they are very common by international standards,í¦ says Hui, 41. Hui is a Harvard MBA and CEO of Beijing-based Chainshine Consulting, which implements the courses together with leading US financial education firm Adkins, Matchett & Toy. Hui is a veteran finance professional. He founded Chainshine Consulting in 1998 after working for Lehman Brothers in Hong Kong and New York for four years. He also worked for five years at Manufacturers Hanover before it was folded into JP Morgan Chase. The financing training market promises to be large. The banking sector alone contains 1.5 million employees, while the securities firms and insurance companies have 100,000 and 500,000 employees respectively. However, the bureaucratic and protected banking sector is generally reluctant to pay for training. In contrast,the securities and insurance companies a desperate to get an edge. Financing techniques in China have historically been rudimentary, not only because of the short history of the capital markets, but also because much more subjective factors are taken into account when carrying out a listing, merger or acquisition. í¦The securities houses are all state-owned, so government connections and backhanders have been an important way of doing businesss. But the success of our workshops suggests this culture is slowly changing,í¦ says Hui. Senior management at securities houses are appointed by the government, and they tend to be uninterested in anything that caní»t show an immediate return. Also, as political appointees, they often have only a rudimentary financial education themselves. Yet middle managers are thirsty for this kind of knowledge. í¦At university, we are taught in Chinese and not by industry practitioners. So ití»s great to get exposure from í«foreign expertsí» who have hands-on experience of the investment banking industry,í¦ comments one trainee. Interestingly, the courses take place in the boom town of Shenzhen, just over the border from Hong Kong. Only a handful of investment houses are headquartered in Shanghai, and even fewer in Beijing. Perhaps the threat of Shanghai taking over Hong Kong as the next financial center has been overblown. í¦There is a market orientation and hunger in Shenzhen,on top of the density of securities companies headquarters, which makes it the obvious place to carry out our training,í¦ says Hui. During the course, students come face to face with something they have rarely encountered before: a clear and strictly enforced disciplinary policy. Any owner of mobile phone which goes off in class must deposit Rmb 5 ($0.60) into a clear plastic container at the front of the room. The students learn fast. After filling very rapidly over the first morning,the amount of money in the container barely changes. í¦Regulations and enforcement are a very weak part of the Chinese capital markets. Regulations are applied unevenly and many companies get away with too much,í¦ comments Hui. Adding to the problems is that the government is wary about the reform process getting out of control. So instead of issuing a raft of detailed regulations, it issues rough guidelines. This give the government discretionary powers to interfere if changes are deemed too radical. Yet it also makes it difficult for companies to know if they are breaking the law. The main regulator of the capital markets, the China Securities and Regulatory Commission, are noticeable by their absence. Perhaps they are too busy scouring the markets for malefactors. Chinaí»s financial markets attract the smartest people in China. The lure is similar to Wall Street, although with an edge. í¦People come to the financial markets in China because they are drawn to the prospect of overnight riches,í¦ says Hui", "but ití»s that get-rich-quick mentality which contributes to many of the problems." One of Huií»s courses, organized for a subsidiary of the Bank of China, reflects the disciplinary problem. As part of their business ethics module staff visit a prison and speak to an inmate, doing a long stint for banking-related corruption crimes. Apparently, it leaves a strong impression. Yet things are changing. With Chinaí»s entry to WTO, local bankers realize they must up-skill and rely less on brokerage commission, which makes up between 40-60% of profits. Stagnant markets and the abolition of fixed commissions in May is putting huge pressure on this revenue source. Everyone wants to emulate China International Capital Corporation, the joint venture with Morgan Stanley, and China's premier investment bank. Although most bankers laud it for its professionalism, there are also grumbles that its success in participating in most the major domestic and foreign IPOs is due to the presence within the bank of Levin Zhu, the son of Chinaí»s reforming premier, Zhu Rongji. The gulf between CICC and the rest is huge. CICC underwrites multi-billion Rmb IPOs while the rest must be satisfied with deals of around Rmb 200 million to Rmb 400 million. Size is important, since although fees are regulated at 1.5-3% of the deal size, in practice they can be as low as 1%. This is considerable lower than in western markets. Yet with so many houses vying for business and the CSRC limiting the number of proposals at any one time by a single investment bank to a maximum of eight, bankers are must get their act together. í¦Previously, bankers just threw as many (listing) proposals at the CSRC as they could, but the CSRC will now only allow new proposals if the previous ones have been cleared. So bankers have been working much harder at making the proposals attractive, í¦ says Hui. Using sophisticated valuation techniques also makes it possible to be more persuasive as to the merits of a companyí»s listing, he adds. The trend is clear: Chinaí»s progression towards a market-orientated, better disciplined financial industry is painfully but surely underway.