Can Leung and Ren get Salomon back into China? Asiamoney, November 2001

And the money? “The balance sheet does bring incredible strength to SSB,” says Mills. “If you look globally at the Citigroup combination it has been a very powerful tool in enhancing our fixed income operations. The use of the balance sheet has added an additional thrust to what was already a very powerful platform.” Indeed, by some measurements, Salomon now ranks first in the US for fixed income instruments. “We have numerous examples of going to clients with a seamless presentation of: here are the capital market opportunities, and if the markets aren’t there, here is what we are willing to do from a loan perspective. That has been compelling.”  He adds: “In China, subject to current and WTO-imposed limitations, we intend to bring that same approach to business. To the extent that we think the market is there, we certainly have adequate capital on a global basis to redirect it where we want to.”

This, if nothing else, has competitors looking closely at developments at Citigroup. “You have to assume they are going to go in there and leverage their Citibank lending relationships to the hilt,” says one. “It’s going to be interesting to see if it works.”

Let’s make lots of money…

So what exactly is at stake here? More than just privatizations – although they represent a lucrative and high-profile prize. China’s entry in to WTO promises greater access to the domestic market in due course. In coming months we can expect close negotiations between Salomon and a local brokerage towards a joint venture, if they are not happening already; a marked concentration on private client business in the mainland; and an effort to improve all areas of business in Hong Kong, Taiwan, and nations with high Chinese entrepreneurial populations.

If the bank gets it right, the rewards will be great – greater even than the considerable salaries in play here. If it doesn’t, it will lose respect as well as fees. It is going to take time – maybe two years – to form a fair opinion of the result, and the jury is still out. But if nothing else, you couldn’t ask for a stronger demonstration of intent.

BOX 1: LEUNG ON LEUNG

The following are edited highlights of an interview between Asiamoney and Francis Leung.

 What was the appeal of your move to Salomon?

The main appeal was the platform Citigroup can offer to me to leverage my contacts and experience in this region, and in particular in China. Through my discussions with the senior management, I was convinced that the commitment of Citigroup to China is second to none, and that it wants to develop a broad range of activities and provide a broad range of services to Chinese clients.

 Before your appointment, Richard Farrant’s report came out, exonerating you – very specifically – of blame from Peregrine’s collapse. Was your appointment conditional upon that?

In fact my discussions with Salomon took place before the publication of the report. The publication was relevant but it was not crucial, nor my appointment conditional upon the publication of the report or the clearance of my position.

 So if we were all still waiting on the report now, you would still have been appointed to this position regardless?

Er… I think so! [Laughs.] The reason I was confident, or comfortable, was because I was aware of the progress of the investigation and I had read the first draft of the report about a year before its publication, at least the part concerning me. So I knew where I stood.

Do you have a job description for what is expected of you at Salomon?

[Full response on this and China opportunities on asiamoney.com] I will initially focus more on China and Hong Kong to help the firm develop its franchise and its business in these two markets. I will leverage my experience and contacts to help Citigroup develop its business there. Additionally I will focus on those markets where there is a large concentration of Chinese entrepreneurs.

…In the medium to long term, there are opportunities for foreign financial institutions to develop their business in the domestic market. Investment banks will be allowed to enter into sino-foreign joint ventures after China enters into WTO, and we can probably start making applications at the beginning of next year. That is one of the other areas I will spend time on: part of my role is to guide Salomon Smith Barney’s development in the China domestic market. We have to consider when we should enter the domestic market, and by what means.  

You are known for the level of your contacts on the mainland. On the political side, how close and how senior are your relations within China’s administration?

I have a broad range of contacts, not just at the senior level, because in order to make something work and get a deal in China, you need to have good relationships at different levels. Of course you need senior level contacts but you need good relations with the senior management of the particular enterprise, not just the government official at the various ministries or the State Council or whatever.

Have you found the compliance environment in working for a major US institution to be noticeably different from those you have worked in in the past?

When I was with BNP Paribas, the compliance, or the regulatory chain, was more or less the same, because BNP Paribas Peregrine was a subsidiary of a bank. Peregrine was an independent investment bank, and we were not subject to banking regulations and so on, so the regime was different. Citigroup is a larger animal, and the US environment is stricter. I can see a difference but that does not mean a hindrance to my work. Our major competitors are US firms, not just in China but the region as well, so they are facing the same issues.

Would a Tom.com have been handled differently if you were doing it for Salomon?

I don’t think so. I think the reason you refer to Tom.com is because of the incident towards the closing of the IPO when people lined up to lodge their application forms. That was something unexpected. So even in a US organization, the same procedure would be involved, but of course we learn from experience. Next time we would be more careful in handling certain things. But throughout the process of the Tom.com IPO we followed the rules and regulations of the stock exchange and SFC. We have not broken any rules or regulations. The incident was a result of unexpected events.

You and Margaret Ren are both known for similar reasons: you are referred to as rainmakers, people who can get the big mandates. Won’t there be an overlap, or internal rivalry?

No, actually I work very well with Margaret. When I was at Peregrine, in 1996 or 97, I tried to hire her! I really thought that she was a very effective coverage person for China, and she could generate deals as well as supervising them. I have known Margaret for a long time and we respect each other. There is no problem with us working together.

Margaret will focus more on privatizations, in particular on ‘elephant’ deals. I will spend more time on the private entrepreneurs. I also have other markets to cover, like Hong Kong – which Margaret will not – and other markets in this region, particularly with Chinese-speaking entrepreneurs.

Only when Salomon’s name appears as a lead manager on a Petrochina or a Sinopec will people truly think: Salomon is back in China. How long do you think that will take?

It’s dependent on the market. If the market is very quiet nobody will have anything to do. This year we have only seen one major deal from China, and that is the CNOOC relaunch. A number of deals have been postponed – China Telecom, Bank of China – because of market conditions and the time they need to reorganize their industries. That will also have an effect on our own progress.

We never underestimate the challenges that are facing us, but now with Margaret on board and the commitment of our senior management, I am confident that we can come back as a major force in the China market.

Not long after you joined, Li Ka-Shing said of you at a press conference: “He is a personal friend and a rare talent. Our company will continue to do business with him.”

I am always very grateful for the support Mr Li has provided me throughout my career, from my first job to my existing job, and he has great trust in me and considers me a friend as well as a trusted advisor. Certainly this kind of support will help me. However, at the end of the day we have to deliver. This market is very competitive.

Shortly after Mr Li made that remark, Citibank was joint lead on a HK$5 billion syndicated loan for Cheung Kong. Several in the market thought of it as a gesture, a sign of approval.

Our capability to deliver something competitive to our clients is the most important issue. I can help, but I need the support of our colleagues to be able to deliver a competitive package to our clients…

I don’t doubt that, and Citibank is one of the most powerful lending houses in the world. But do you think your appointment was part of the reason for winning that business?

[Laughs.] My appointment helps, but the most important thing is that we have a very competitive package.

On the technology side in particular, many deals you have done have lost money. How do you feel you are perceived by investors?

I think that is not a fair comment. Look at the two major technology client transactions my previous employer had in that sector. First, PCCW: when we first placed those shares the offer price was 31 cents [HK], and PCCW’s market price is still well above that price, although we subsequently placed some shares at a higher level than that. At the time when we did the [later, HK$23] placement, the market was overwhelmed, oversubscribed, and at that time I remember that a number of major houses put out research reports with targets at higher levels – 30, 40, even 60 dollars. But the market turned, and after the events people lost money, the same as in the US.

The other example is Tom.com. Its market price is still above its IPO price, probably the only dotcom issue launched in 2000 that still stays above its IPO price. If you look at the US, many technology companies have share prices of less than one tenth of their respective highest levels, and many have gone bust. None of the IPOs I have launched have gone bust.