The ‘twenties’ are shaping up to be a pivotal decade for the securities industry in China: one where it will become clear whether the global investment banks and brokers can truly cement themselves there. Also on the agenda: can their domestic rivals create flourishing businesses beyond mainland China and Hong Kong?
By the end of this year foreign intermediaries will be allowed to wholly-own their joint ventures in China for the first time – a milestones in the opening up of the capital markets. Nominally, they are gaining access at a fast clip. Just this week foreign banks were given permissions to underwrite local government bonds and a number already enjoy majority ownership of their joint ventures. (HSBC was the first to take a majority stake in an onshore securities house and Nomura grabbed a licence for its majority-controlled JV in November, allowing proprietary trading, brokerage and asset management.)
The competition these overseas players provide should accelerate consolidation among China’s 130 or so domestic brokers; something the government is encouraging. Last mo nth Bloomberg reported that the China Securities Regulatory Commission (CSRC) is planning to create “aircraft carrier-sized” domestic brokerages by supporting mergers. The indications are the country’s largest investment bank, Citic Securities, will be at the vanguard after buying Guangzhou Securities for $2 billion in December 2018.
Citic Securities’ former CEO, Wang Dongming, was one of the first to harbour ambitions of creating a Chinese brokerage with global reach. In 2012, the US-educated banker drove the acquisition of Asian investment bank, CLSA. However, he lost his job after the 2015 stock market crash and the takeover has spawned culture clashes – a Chinese institution ready to respond to the government’s policy objectives hasn’t always meshed with one renowned for its independent thinking.
Most analysts still have an optimistic outlook for China’s bigger securities houses (most are trading slightly above their historical troughs, despite the mini-bull run in the Chinese markets). But the industry also acknowledges that the best of the brokerages still trail their global rivals by some distance. S&P Global Market Intelligence data underscores the difference between Citic and Goldman Sachs, for example. Its analysis shows that in the 12 months to September 2019, Citic scored one remarkable achievement: its $102.04 billion in equity outstripped Goldman’s $94.09 billion. However, the same cannot be said for net profits over the same period: Citic recording $1.76 billion and Goldman $9.09 billion.
China’s securities houses are still reliant on low margin businesses such as retail broking. In 2018, retail investors accounted for about 75% of mainland market turnover, compared to 40% in Hong Kong. However, the government is helping bigger firms like Citic and CICC by approving them to undertake higher margin businesses such as derivatives marketmaking and STAR market IPOs, which require a more sophisticated approach as there is no initial valuation cap.
When it comes to US IPOs, the American investment banking fraternity has been adept at keeping international competitors at bay. Fees have stayed high: 5.5% versus less than 2% in Hong Kong, where competition for mandates is fierce. More recently CICC and Haitong have made some inroads into US syndicates. Perhaps they will do better in the American markets – where European banks have made less progress – because their Chinese clients want them there.
This is the strategy that Citic is pursuing: bring its Chinese clients offshore and leverage these relationships to win new business. Yet the experience of the Japanese and South Korean securities houses isn’t an appealing precedent. Both have tried and failed to create international investment banks.
What all three countries share in common are ethnically homogenous cultures. By contrast, the Western investment banks are more multi-cultural, which helps them adjust to the countries where they are doing business. Credit Suisse is a good example – led by a CEO from Cote D’Ivoire. How long before a Chinese securities house has an African boss? That may prove to be a greater measure of long-term success.
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