According to the historians Peter Cain and Tony Hopkins, the British empire was based on a unique form of gentlemanly capitalism (described by them as an alliance of financial interests and the landed nobility). Over the past week, Chinese commentators have been using a similar metaphor to describe the role that an “aristocratic” bank may now play in helping their own country to realise its ambitions on the global stage.
CICC – the first Sino-foreign joint venture investment bank – has just announced an agreement to purchase China Investment Securities for Rmb16.7 billion ($2.4 billion) from Central Huijin Investment (which happens to be the largest shareholder in both firms and is a holding company for state assets).
The deal isn’t the biggest takeover in the Chinese broking industry (Shenyin Wanguo Securities paid $6.4 billion for Hongyuan Securities in 2014). But it is undoubtedly the most symbolic, with a number of analysts suggesting that the government has chosen CICC as the catalyst for an effort to upgrade the domestic securities sector.
For instance, China First Capital’s Peter Fuhrman told Bloomberg that the government wants CICC to play a “civilising and globalising role with the far-reaching aim of helping professionalise the often shambolic Chinese stock market”.
As Citic Securities’ formidable (and now former) chairman Wang Dongming once pointed out, China’s investment banking sector has always been the creation of government, and not the markets. By contrast, the British merchant banks and their US counterparts – which rose to global prominence in the 19th century – were very much the product of Cain and Hopkins’ gentlemanly capitalists.
In this regard, some believe that too much is expected of the move, and CICC could struggle to bring about significant change in its sector. That said, the merger makes strategic sense in marrying CICC’s investment banking strength with the retail broking experience of China Investment Securities. But CICC will need a lot more than government fiat to compete in the fiercely competitive brokerage industry. And HSBC also argues that the merger is fraught with execution risk, noting that China Investment Securities is losing market share despite its 192 branches (compared to CICC’s 20). This physical presence may even prove a burden at a time when most new accounts are being signed up online.
iFeng.com also suggests that CICC’s “aristocratic temperament” will work against it. It says that one of the main reasons why the group has been in decline for years is that it got too accustomed to living off large state-owned privatisations during the early years of its existence. Then it didn’t adapt when the IPO market switched to smaller, private sector companies.
“CICC is arrogant and it has found it difficult to get off its high horse and compete with the multitude of new competitors,” one banker tells iFeng.
As we wrote in WiC301, CICC had pursued a conservative, risk-averse approach under its longstanding CEO Levin Zhu (the son of former premier Zhu Rongji). CICC’s new boss Bi Mingjian has already displayed more expansionist credentials but will be mindful of a more cautious mood. Since 2015’s stock market crash, policymakers have been trying to clean up some of the more buccaneering practices and also encourage more institutional involvement in a domestic equity market still dominated by retail investors (they make up just over half of all trading).
On the international stage, Bank of China has also announced a potentially transformative move, with plans to spin off its investment banking arm, BOCI.
This too signals a reorganisation of the sector and a move to address a problem: many institutions have built up several syndicate desks that have ended up fighting amongst themselves for business. Bank of China in Hong Kong is a case in point with three different debt capital markets teams competing for clients (BOCI, BOC and BOC Asia).
The task ahead for many of China’s banks is to present a more coherent face to the rest of the world and challenge their more established international rivals. BOCI’s spin off may be the first step to recasting its structure more along Wall Street lines.
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