New partners thin on ground
Global investment banks seeking to establish joint ventures on the mainland following Beijing's recent policy liberalisation have found a new problem: there are few choices of local partners left.
Following discussions about the new measures with officials from the China Securities Regulatory Commission (CSRC), foreign investment bankers say the regulator plans to give them a list of only about 20 local securities firms to choose as partners.
The bankers, disappointed by the limited options, declined to name any firms on the CSRC's recommendation list.
Most of the firms, they said, were mid-sized Chinese brokerages focusing on one region that covers provinces and cities, rather than the entire national market.
At last month's annual Sino-US Strategic and Economic Dialogue, Beijing said it was further opening up the financial services industry to foreign investors, allowing them to acquire stakes of up to 49 per cent in securities ventures on the mainland.
'The game is changed,' said an investment banker in Hong Kong who declined to be identified.
'Basically, you had better ask the regulator first if it has any recommendation for you to set up a joint venture,' the banker said.
'Otherwise, if you go ahead without advice from the regulator, at the end of the day even if you find your partner, the joint venture may not be approved.'
A total of 13 foreign financial institutions have set up securities ventures on the mainland in the past decade.
Goldman Sachs and UBS were considered early birds.
Before Beijing's announcement last month about foreign ownership in mainland-based securities ventures, the maximum stake a foreign institution could hold in such a joint venture was 33 per cent.
Some foreign banks who have yet to establish a joint venture on the mainland want to replicate the success of Goldman Sachs and UBS by partnering with small local brokerages that may be in financial strife.
Many years ago, Goldman Sachs and UBS each bought a small, troubled Chinese brokerage in so-called 'rescue deals', allowing them to take over the operating licences of these firms and turn them into new joint ventures.
Foreign investment banks prefer to choose a small Chinese securities firm, rather than a big one, as partner partly because they are keen to get de facto management control of the joint venture.
And the price for partnering with a small firm is usually much lower than with a big firm. 'It is no secret in the industry that we [a global investment bank] just want to get the licence [to do investment banking business on the mainland] and have some local staff there,' said another banker who is reviewing some joint ventures.
'It can serve as a platform for us so the joint venture is not necessarily big in terms of company size.'
Indeed, overseas banks are not keen on investing in large listed Chinese brokerages since their high share prices would result in high costs for a joint-venture deal.