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Eric Ng

United States-based investment bank Salomon Smith Barney is in talks with mainland brokerages to form a joint venture to trade domestic shares.

The move is seen as preparation by the Citigroup unit to take part in expected opportunities in the mainland's financial market after its entry to the World Trade Organisation.

Salomon has been approached by several mainland brokerages, and is in talks with two Shanghai-based brokerages on joint-venture opportunities, said Huan Guocang, vice-chairman of Salomon Smith Barney Asia.

Although the talks began last year, Mr Huan said they were still in the preliminary stages, and that any future joint ventures would be subject to government approval.

'Under current regulations, foreign brokerages are not allowed to conduct domestic share-broking,' he said.

'However, we are looking at ways to become involved in the domestic brokerage market which we believe has substantial growth potential.'

Mr Huan said the size of the market as well as the volume of trade on the mainland's share markets had grown to levels comparable with that of the Hong Kong market.

The firm is seeking mainland partners which have leading market shares and a good understanding of the way international markets operate.

'As the domestic share markets are expected to be opened to foreign participation, international standards will be applied,' he said.

Mr Huan said the business scope of any joint ventures to be formed would depend on government policy.

Under the mainland's WTO deal with the US, joint ventures which are 33 per cent held by foreign firms would be allowed to underwrite domestic equity issues, and underwrite and trade in international equity, as well as corporate and government debt issues.

At present, foreign brokers are allowed to trade only B shares that are open to foreign investors, while A shares are restricted to domestic investors and brokerages.

Andy Xie Guozhong, Morgan Stanley Dean Witter Asia's chief economist for Asia excluding Japan, said until foreign investors were allowed to trade A shares, he saw little room for foreign brokerages to add value to the share markets.

Mr Xie said foreign brokerages could add the most value through their research capabilities, but this has been limited by the differences in accounting standards between the mainland and international markets.

'Foreign brokerages can't survive in this market unless they can sell domestic shares to foreign investors,' he said, adding foreign investors were not expected to be able to trade A shares for at least another 18 months.

Anthony Neoh, chief adviser to the China Securities Regulatory Commission - the mainland's securities watchdog - said late last month that foreign investors could see their first inroads in the A-share markets through joint-venture mutual funds and proposals to allow qualified foreign institutional investors to buy A shares.

The qualified investor system is also not expected to be implemented for 18 to 24 months.



Salomon in mainland share-trading talks