Can China entrants make access to coveted markets pay?

There are some other interesting differences in the new ventures from the old ones. When Goldman and UBS came in, they did so with partners lacking credibility or power. In Goldman’s case there wasn’t one really: they have effectively been able to start from scratch, which has the disadvantage of lacking any legacy relationships or businesses to build on, but has made it much easier to build an integrated business in the global Goldman style. One could argue, for example, that Goldman Gao Hua looks a lot more like Goldman Sachs than Goldman Sachs JBWere in Australia does. All 300 or so staff in the aggregate venture are, if not technically on the Goldman payroll, then on a remuneration system consistent with the Goldman system globally. In UBS’s case the licence involved it bailing out a struggling brokerage, Beijing Securities. Some say the legacy staff are something of a handicap or reputational risk to UBS but that’s a bit of a red herring too: most of those staff went with the sale of the retail brokerage business to China Merchants Securities around the time of the takeover, and today, out of about 380 staff in the overall business, only about a quarter originally came from Beijing Securities, with the bulk of staff hired directly from the market.

Today, though, institutions are being paired with real local partners. The CSRC has a list of local brokers it considers strong enough to partner with internationals, and while they are not the top tier of Citic, CICC, BOCI or Galaxy – none of whom need a local partner anyway – the names on this list are not duds. These are the partners that foreign banks are now tying with.

In one sense that’s good: look at how Founder has already been able to steer underwriting business to its new venture with Credit Suisse. Strong partners are good partners. But some interesting issues arise from it. “It is not clear to me whether they [the new licences] have been allowed to put in place statements or provisions that give the foreigner clear operating control,” says one analyst. “It’s clear China has said: if you come in now, it can’t be a little pushover guy, they have forced people to do deals with counterparties with much more substance than the counterparties that Goldman and UBS were initially dealing with.”

“That doesn’t mean they’re not going to do well, but it looks like an attempt to provide some balance and not to make it so easy to have a foreigner say: ‘whatever we call it, it’s me getting the licence and I’m going to do my own thing.'”

Zhang at Credit Suisse says his bank’s 33% stake in its venture “represents the dividend, the economic interest of the shareholder. It does not represent who controls what.” But he doesn’t then follow that up by saying Credit Suisse has control. “The JV management itself controls the future of the JV, and both shareholders have delegated the management power to the JV management itself” (the chairman comes from Founder and the CEO from Credit Suisse). This is a far cry from the language Partnow uses to describe UBS’s role in UBS Securities – “It was clear when we started to put together this venture the shareholders wanted us to be the ones operating it”. In Deutsche’s case, Shaanxi contributes six members of the board, including the chairman and two independents; Deutsche contributes three, including the CEO (Charles Wang, currently Deutsche’s head of China investment banking) and an independent.

Despite the handicaps, banks need these ventures: when equity markets one day come back the fashion for having both A and H share listings, often simultaneously, will come back too, and banks must have underwriting capability on both sides of the line to be serious in that business. For banks like Deutsche, these licences complete the picture they have been building up for years to bring all their global businesses into China. If banks need to wait five years doing only underwriting before getting into the meat of secondary business then that’s still a good reason to be in there. But the impression is that the first mover advantage Goldman and UBS were given was actually bigger than anyone suspected – even, one imagines, them.