Foreign investment banks are quietly joining the restructuring of China's more than 100 securities houses to take a solid footing in the market before it fully opens up.

Instead of launching new joint ventures (JVs) with Chinese securities houses and holding minority shares, more large global investment banks are exploring the possibility of directly setting up their own businesses in China, insiders said.

That may be done by buying an existing Chinese securities company. Those with a poor performance record, like heavily indebted firms, will likely be a target.

This would not only offer foreign companies new access to China's securities industry, but would also help troubled domestic companies turn around and reduce the financial burden on the government, said Fang Xinghai, deputy chief executive officer of the Shanghai Stock Exchange.

China's securities companies have been better protected than many other financial institutions like insurers and banks in the opening up process since China joined the World Trade Organization (WTO) at the end of 2001.

So far, only two Sino-foreign securities joint ventures have been established in China - one between Xiangcai Securities and CLSA and another between Changjiang Securities and BNP Paribas. Both the European companies hold 33 percent stakes in their joint ventures, the maximum ratio allowed for foreign stakes in such projects.

That is certainly a small step forward compared to the enthusiasm for fund management companies, which already have eight JVs established, and the qualified foreign institutional investor (QFII) scheme, which licensed 12 foreign institutions to trade A shares, mutual funds and bonds by the end of last year, experts said.

The pace of the opening up of the securities sector also lags behind those of the insurance and banking sectors, which have attracted many leading international firms since China's entry into the WTO.

One of the reasons for this is that the existing business scope of the securities houses' JVs is still rather limited, said Fang. They can underwrite A shares, B shares, bonds and H shares, but are prohibited from doing A-share brokering or making proprietary investments.

"That has greatly reduced their business viability, so many of the big foreign investment banks have held back their moves," said Fang.

He suggests the Chinese authorities speed up the opening up process in the sector by giving foreign partners more equity stakes in joint ventures and give JV securities firms equal treatment as with existing domestic firms.

If a general and sudden opening would shock the local industry, then, every year, at least one foreign company should be allowed to launch its securities business in China with controlling shares, said Fang. And Chinese partners should not be limited to securities companies. Other financial institutions and industrial firms should also be able to take part, he added.

That will greatly promote healthy development of the overall securities industry in China, said Fang.

Insiders say Goldman Sachs, a firm which has remained prudent in entering the investment banking business in China, is seeking such a model.

It is said to be in talks with Hainan Securities to take over the troubled company and become a main shareholder, which may give relief to the Chinese authorities who may otherwise have to take over the company itself or find a willing domestic buyer.

Mei Zhang, the executive director of corporate communications at Goldman Sachs (Asia), however, declined to comment on such talks.

"We are still exploring all options (on the entry into the securities business)," she said, adding that no deal in this regard has been reached.

Whether such an imminent entry of foreign-controlled investment banks is likely or not, the China Securities Regulatory Commission (CSRC), the industry's regulator, has already been keen on restructuring the 133 domestic securities houses to improve the industry's performance. It has been introducing more market-driven rules, including the sponsor system for stock listings, encouraging good performers to become stronger by offering them more support and letting poor performers gradually withdraw.

Industry sources say the CSRC has drafted a regulation on classified management of the securities firms and is seeking public opinion. It classifies all securities firms into four categories A, B, C, and D and sets up a threshold for each class according to asset quality, financial soundness, operational efficiency and risk control, among others.

Those in the higher class are expected to receive more policy support in terms of future development and product innovation.

Meanwhile, since 2002, seven domestic securities houses have been closed down or taken over by other securities firms. Last year, more than a dozen firms were put on the CSRC's list of "high-risk monitoring", which means they have been closely watched by regulators against potential risks in operations and management.

This January, the authorities made another move to take control of the scandal-hit Southern Securities, which was once a key player in the industry but is now believed to shoulder billions of yuan worth of debt that it cannot repay and has been caught in irregular activities like embezzlement of client funds.

But that is a special case, and the government is unlikely to come to the rescue every time, said Ba Shusong, deputy director of the Financial Research Institute of the State Council Development and Research Center.

The trend is to let market mechanisms function well, which will push industrial restructuring forward, he said.

Ba predicts that China's securities houses will see an increasing number of mergers and acquisitions in the next five to 10 years, led by market rules.

More foreign investors and domestic private investors will also take part in the restructuring.

"We can see some positive signs that the authorities are upgrading the regulatory scheme to encourage free competition and build a market withdrawal channel," he said.

But the process of realizing free market competition will take time.

"I guess in the near term, it is unlikely to really let a securities house go bankrupt for the sake of maintaining financial stability," said Dong Chen, an analyst with the research institute of Beijing-based China Securities Co. "The troubled ones are more likely to be acquired or taken over by others, including foreign firms."

But the reshuffling of the industry is unavoidable in the long run, he said. And not every one can stay.

Dong's company, for example, has been making its way towards the top of the pyramid.

It is still in talks with potential foreign partners on the issue of launching a securities JV, though that would take patience and compromise, he said.

It is also trying to get a licence to issue corporate bonds, a new financing channel for the fund-thirsty securities business. Three securities houses - CITIC, Haitong and Greatwall, which are believed to be among the better-performing firms - already received the first batch of bond issuing licenses earlier last month. But many more have been applying.

(China Daily April 5, 2004)