There was an interesting article in the South China Morning Post today (sorry, subscription required) about China’s securities regulator extending a ban on foreign investors buying into the country’s securities brokerage sector.
In a typical example of the tenuous link between law and actuality in China, the ban was enacted in September this year. However, everybody knew the ban has been in place since the end of 2005, although it was never formally acknowledged.
Regardless, Swiss Investment bank UBS has been ploughing ahead with its attempt to take a 20% stake, and de facto management control, in troubled domestic brokerage Beijing Securities, although the regulator is forcing it to jump through hoops in the process.
Goldman Sachs has also made inroads through a complex (or perhaps simple) financing arrangement with Beijing Gao Hua Securities Company Limited. The securities firm, which is fully licensed to engage in the domestic securities brokerage and proprietary trading businesses, is owned by a group of investors led by Fang Fenglei, a well-known China investment banker. However, the brokerage was basically paid for by the secretive US investment bank.
When regulatory conditions allow, Goldman will, by all accounts, exercise its option to take formal ownership of the brokerage, and its valuable domestic securities brokerage and proprietary trading licenses. In the meantime, it has full run of the place anyway. (The two firms are partners in the joint venture Goldman Sachs Gao Hua Securities Company Limited, but Goldman Sachs has access to secondary trading in the domestic markets through its JV partner, not the JV itself, hence commonplace confusion over the legal and operational status of the arrangement).
How long it is until regulatory conditions allow for official foreign entry remains up in the air, but it is certain the sector will not be reopened until the China Securities Regulatory Commission finishes recapitalising and restructuring the country’s 108 remaining brokerages, and consolidating them through mergers and acquisitions. The SCMP reckons that could be next August, although my money says that will be the absolute earliest.
What the CSRC is trying to avoid is a repeat of London’s Big Bang, which occurred when the LSE dropped barriers to foreign participation in 1986: it cemented London as the heart of European investment banking, but also devastated the city’s brokerages.
The Japanese coined the term the "Wimbledon Phenomenon" to describe the paradox: although Britain provide’s the world’s foremost tennis tournament, domestic players are poor, and the winners are all foreigners.
According to one financial sector official I spoke to a couple of months back, the CSRC has not even drawn up their strategy for opening up yet.
That’s why Goldman and UBS are allowed in. Their job is to import Wall Street principles and practices, preparing China’s players to win at home when the foreign invaders breach the gates. More importantly, they are also here to teach the CSRC how to officiate and interpret the rules. After all, you need to know the rules to bend the rules in favor of the home team.
But the job is a long way from being done. Until it is, China’s answer to Tim Henman, Britain’s best Wimbledon "hope" and perennial early round exiter, will continue to enjoy home court advantage. Now he is winning by ignoble default, and the CSRC is unlikely to change the entry criteria until it is sure its Henmans will win through a superior game.
Probably combined with a subtle home court advantage, courtesy of the court side officials.