UBS has become the first foreign institution to buy control of a mainland brokerage, its US$210 million purchase of a 20% stake in Beijing Securities, making it the biggest single shareholder in the debt-ridden broker.
That the Swiss bank has been allowed to take effective management control of the brokerage shows just how flexible Beijing is prepared to be in order to secure the foreign capital and expertise that could turn the brokerages around.
According to government regulations, foreign investors are limited to taking a maximum 33% stake in investment banking ventures with Chinese partners. These ventures can underwrite A-share offers and new bond issues but are not permitted to trade yuan-denominated shares and bonds listed on domestic stock exchanges.
Exceptions are starting to be made, though, prompting other foreign investors to seek out potential partners among China's 130 plus securities houses. Regulators are believed to have green-lighted Morgan Stanley's application to buy into another securities house alongside its alliance with China International Capital Corp (CICC), establishing it as the first foreign operator with stakes in two brokerages.
CICC focuses on international equity offerings by Chinese companies, so an investment in another brokerage would allow Morgan Stanley access to domestic listings and share trading. In this way, it could match the investment scope equal to that of rival banks UBS and Goldman Sachs, which set up a securities house last year with Fang Fanglei.
Credit Suisse First Boston's efforts to enter the market are focused on a possible investment in Xiangcai Securities, one of the country's largest second tier securities houses, which already has a investment banking joint venture with CLSA. Bankers see Shanghai-based Xiangcai as an attractive acquisition target, saying it fits the Beijing Securities mould as a brokerage that is "small enough not to be unmanageable and yet large enough not to be irrelevant."
Meanwhile, JP Morgan is thought to be considering the acquisition of a stake in Liaoning Securities in northeast China.
ADB and IFC approved to issue bonds
The Asian Development Bank and the World Bank's International Finance Corp received central bank approval to become the first international financial institutions to issue 10-year yuan-dominated "panda bonds", The Wall Street Journal reported. The ADB may issue RMB1.0 billion in bonds and the IFC may issue RMB1.13 billion on the interbank market, where the bonds would be traded, according to statements posted on the central bank website. The central bank did not say when the bonds would be issued or how the interest rates would be set. Opening the bond market to foreign investors will help China develop an alternative source of funding for companies that have traditionally relied almost exclusively on bank loans.
Investor compensation scheme launched
A stock rescue fund to compensate investors who get caught up in the collapse of mainland brokerages is to be launched by regulators, state media reported. A company was set up in early September to manage the fund, overseen by five government agencies, including the China Securities Regulatory Commission, the Ministry of Finance and the People's Bank of China. Analysts believe the fund, which will be financed by small portions of stock trading commissions from the Shanghai and Shenzhen stock exchanges, as well as brokerages, could be worth up to US$6.2 billion.
CDB plans asset-backed securities issue
China Development Bank, a state-owned policy lender that funds public works, is to sell RMB5.3 billion of asset-backed securities in the first such sale in China, Bloomberg reported, citing documents distributed to investors. The assets backing the bonds comprise 62 loans covering industries, including power generation, telecommunications and public facilities. Wang Yanqing, director of the China Banking Regulatory Commission called CDB's offering "a significant innovation in China's nancial industry," pointing to the role it will play in the development of the country's bond market.
Beijing backs down on offshore rules
Restrictions on mainlanders setting up and investing in offshore vehicles are expected be relaxed by the end of the year under a new legal framework drafted by the central government, the South China Morning Post reported. The new rules proposed by the State Administration of Foreign Exchange SAFE) allow individuals to register with local foreign currency exchange bureaus for offshore investment transactions. Restrictions issued earlier this year preventing mainland residents from setting up or holding shares in offshore companies have been blamed for the drop in the value of merger and acquisition deals.
China's cost below global standards
China's economic boom is masking balance sheet problems in the country's largest companies, The Wall Street Journal reported, citing a report by Citigroup and Moody's Investors Service Inc that compares 686 of China's largest listed companies with nearly 5,000 other publicly traded companies throughout the world. The report found the average big Chinese company is behind global standards in developing a sound financial structure that allows them flexibility in the event of major cyclical changes.
Mutual fund raises US$602 million
Bank of Communications (BOC) and Schroders Plc raised US$602 million with the first fund product from their new asset management venture, state media reported. The US$25 million venture between China's fifth-largest lender and the British asset management group, launched in August, was only the second of its kind offered by a Chinese bank. It follows the mutual fund offering made by Industrial and Commercial Bank of China (ICBC) with Credit Suisse First Boston in July, which raised US$537 million. China's fund industry is now thought to be worth nearly US$62 billion.
Laundering regs to cast net wider
Anti-money laundering efforts will be expanded to include the insurance, securities and real estate sectors as well as the sale of precious jewelry, as part of a campaign to rein in corruption, state media reported. In the past, policing efforts have focused on banks, with China's 17 commercial banks making more than 650,000 reports of suspicious transactions involving US$108 billion since the central bank established its anti-money laundering unit in April 2004. About 1,500 of these cases were handed over to the authorities for investigation.
TRANSPORT AND LOGISTICS
Hainan Airlines to seek HK listing
Hainan Airlines will form a new company, Grand China Air, and seek to list its enlarged aviation assets in Hong Kong next year to raise funds for a further expansion its fleet and service network, Bloomberg reported. The carrier is in the process of merging with three smaller groups, Xinhua Airlines, Changsha Airlines and Shanxi Airlines. American financier George Soros was one of the first to back the restructuring efforts, having agreed to double his investment in the airline to US$50 million in return for a 4% stake in Grand Air.
China considers US ports
A mid-October meeting between officials from southern China and a US federally funded group called West Coast Corridor Coalition (WCCC) could result in China investing billions of dollars to relieve the bottleneck at America's west coast ports, according to the California paper, The Oakland Tribune. WCCC is exploring ways to address bottlenecks in the road and trucking infrastructure to ports in America's west coast including Washington, Oregon and California. China's possible participation in the West Coast Corridor Coalition has been in discussion since the beginning of the year. Bottlenecks, which have been particularly acute at the Los Angeles and Long Beach ports, two of the nation's busiest container ports, have been an issue of concern for the Chinese government, said Glenn Pascall of the WCCC.
Citigroup to advise Sinotrans IPO
Citigroup has been hired to help manage a US$500 million IPO of China's largest air-freight company Sinotrans, Bloomberg reported. Sinotrans, also known as China National Foreign Trade Transportation Group, plans to sell shares in its dry-bulk business in 2006. Bank of China and Credit Suisse First Boston are already working on the deal. Citigroup rates fifth among underwriters of Chinese stock sales in 2005, Bloomberg said.
FedEx begins China-India link
Federal Express in mid-October launched the first daily overnight express delivery link between India and China, part of the express courier's new eastbound around-the-world route – connecting Europe, India, China and Japan with its US hub in Memphis – that will provide unprecedented access to and from the world's largest markets. FedEx said in a statement that it would double current capacity between Europe and Asia with the addition of 850,000 lbs per week.