Over the past decade, Shanghai Shenyin & Wanguo Securities has become dominant in China's securities industry and its next goal is to become a force in the Asia Pacific region.
Back in 1984, a team of 30 people from the Shanghai Industrial and Commercial Bank completed communist China's first-ever conversion of a local state-owned company to a shareholding system ? a corporate structure then deemed as capitalist. Six years later, the same group left the state-owned bank to form a shareholding securities firm called Shenyin. The major shareholders, including the bank and Shanghai Citic, are all state-owned. After a highly-publicised merger in July 1996 with Shanghai Wanguo, its former arch rival, the company changed its name to Shenyin & Wanguo with a workforce in excess of 3,000.
This spectacular rise could not have been achieved in such a short time without government support in what remains a protected marketplace. The influence of the government in China's securities industry is often greater than market forces. Domestic brokers tend to be awarded lead manager status in new issues despite their limited experience compared with foreign brokers in China. Foreign brokers cannot lead underwrite nor undertake a rights issue without a local partner.
However, the move which really catapulted Shenyin to prominence was the merger in 1995 with Shanghai International, which was then the leading brokerage in the country. This not a considered government strategy, but rather a damage limitation exercise after a major financial scandal rocked Shanghai International and denuded it of much of its assets. The former head of Shanghai International, Mr Guan Jinsheng, was jailed for 17 years for embezzlement and accepting bribes.
The product of these two mergers is a company dominant in China. Of the 362 companies floated on the Shanghai Stock Exchange since its establishment in December 1990, Shenyin & Wanguo can claim credit to sponsoring at least 30 per cent of their initial public offerings. A recent report shows that in trading B-shares the company accounted for over half of the total turnover of Yn9.4bn (US$1.lbn) in the stock exchange last year. This was far ahead of Jardine Fleming Securities which ranked second with a turnover of US$170m and Haitong Securities is third with a turnover of US$150m.
Shenyin & Wanguo is now looking to develop a regional role, but here it will certainly face strong competition.
"Competition is a good thing," says Mr Lu Wenqing, the company's assistant general manager in charge of international business. "We are not afraid of competition at all." Admitting that there is no domestic broker with sufficient resources to pose any threat, Lu expects competition to intensify with geographical expansion.
Merger of markets
In China, head-on competition with foreign brokers will not start until the merging of A-shares, designed for domestic investors, and B-shares, designed for foreign investors, following the full convertibility of the Chinese currency against hard currencies. Vice-premier Zhu Rongji, who is in charge of the overall economic reforms in the country, has pledged to make the local currency freely convertible by the year 2000.
At the moment, foreign brokers such as Jardine Fleming are excluded from the A-share business. As for B-shares, they are small in capitalisation and poor in liquidity ? an unappealing prospect to institutional investors who are usually the pillar of a sophisticated market and the main income source of the likes of Jardine Fleming. By contrast, the majority of Shenyin & Wanguo's clients in B-shares are individuals with a penchant for speculation, and who's activities account for the high turnover and volatility in the market.
Mr Lu takes great pride in his "highly-skilled workforce and the number of well-educated people among middle and senior management". However, it is precisely the issue of how to retain such employees in a more competitive environment that may prove to be the company's Achilles' heel.
Business is expected to grow rapidly after the merger of A- and B-shares. Foreign brokers already operating in Shanghai will need to expand. The shortcut for such expansion, ubiquitous in financial markets across the world, is to poach talent from other houses. Shenyin & Wanguo will be top of every firm's hit list.
Unless the company modernises its remuneration system to international standards within the next three years, defections will undermine its competitiveness in this cut-throat business.
Indeed, Shenyin & Wanguo has already experienced the strains of being a state-controlled enterprise. A secretary in a foreign broking firm in Shanghai, for example, could easily demand US$6,000 a year, about the same as a middle-ranking manager in Shenyin & Wanguo. An office representative of a foreign rival, at most a middle-ranking manager in the corporate ladder, could have an annual salary of as much as US$40,000, much more than senior managers such as Mr Lu.
With such inducements from foreign competitors, Shenyin & Wanguo wig find recruiting and retaining talented staff to be one of the major battles it will have to fight in order to retain its leading position.
The company's intention to expand regionally is also likely to be constrained by the company's image and internal structure. When rumours started in early 1996 that Shenyin & Wanguo was seeking a 'substantial' stake in the Hong Kong broker Sun Hung Kai Securities to expand its presence in the colony, SHK's staff in London and Hong Kong started to leave.
"We were absolutely terrified at the prospect of having a Chinese state-owned company as our parent," says Mr Mark Child, former managing director of SHK London. "It was never going to work out, not for us anyway." He attempted, unsuccessfully, to move his entire team to a rival company.
His Hong Kong counterpart fared better. Mr Yip Lai Shing moved went to Vickers Ballas, Singapore's largest broker and itself striving to establish a regional presence. He was followed by 50 colleagues. Partly because of the exodus and partly because of government bureaucracy, Shenyin was forced to abandon the expansion plan altogether.
In the dynamic world of finance, where there have been many high-profile stockbroking acquisitions by leading banks, Shenyin & Wanguo's status as a state-owned company is likely to continue to shackle its regional expansion plans.
Hong Kong expertise
These difficulties have already prompted a more cautious tone. "We don't have a set goal yet [as to when the company will become a regional broker]," says Lu, the assistant general manager. "Our management skills will improve through competition and development in the market. But we will be there."
Over the coming years, a more realistic approach might be to consolidate its presence in the mainland. Shanghai is looking to learn from Hong Kong to improve its services industry. Vice-mayor Chen Liangyu led a delegation to Hong Kong recently to appeal for help from Hong Kong. In the second half of the year, "we will sit down and identify areas where we can work together," Chairman of Hong Kong Trade Development Council Mr Victor Fung Kwok-king was quoted as saying.
Commenting on Hong Kong as a regional financial centre, Mr Lu of Shenyin & Wanguo said, "It [Hong Kong] is so far ahead of us. It will continue to be a regional centre after the handover," echoing the typical Communist Party line. In private, he believes that in 20 or 30 years time, Shanghai will overtake Hong Kong and become the financial centre for the region. And his company hopes to play a major role in the process.