Hong Kong-based Bank of China International (BOCl) has come a long way since it was set up in Lon-don in 1996. However, it has been rocked by recent senior managerial departures that have raised questions about its ability to retain top talent and forge a clear and consistent strategic direction. Worse still, the departure of a top analyst criticized by former Chinese premier Zhu Rongji underlined a lack of independence at the investment bank when it comes to commenting on issues sensitive to the authorities in Beijing.
Over the past seven years, BOCI has been expanding on the back of the strong Chinese economy. Originally specialising in corporate finance, BOCI now offers a wide range of financial services, including equity sales and fund management. In 1998 its headquarters were relocated to Hong Kong where its parent, Bank of China, is the largest bank in terms of assets after HSBC. Two years later, BOCT opened representative offices in Beijing and Shanghai.
China specialist boutique
Its political connections on the Mainland have brought in a number of deals, including the first-ever H-share listing, Tsingtao Beer, and the ongoing partial privatisation of utilities in Shenzhen. According to company spokeswoman Melody Wang, BOCI is "a profit entity, without doubt."
Alistair Campbell, BOCI's head of corporate finance in London, describes his bank as a China specialist boutique, with ambition to become a regional heavyweight with a global sales support. "China is the place in the world where big deals are done at the moment. And we are the people that are doing the deals," he says. His London office covers most of the rest of the world market, while Hong Kong takes care of Asian sales.
But the opening of the two domestic representative offices suggests a rather different strategic emphasis. 'I think they will focus on developing their share in the domestic market," says Jonathan Anderson, former IMF Beijing resident representative and now chief Asian economist at UBS Warburg.
He adds that, if BOCI wants to become a regional heavyweight in the future, it would take years to build up the necessary expertise beyond China. In the domestic market, it is playing to its strengths. "But anything could happen in 10 or 20 years' time. Who knows?" he says.
As BOCI strives to make more of an impact on the Mainland, it will compete head-on with market leader China International Capital Corp (CICC), a joint venture between Morgan Stanley Dean Witter and China Construction Bank. Last year, CICC served as lead underwriter of four stock offerings that raised nearly RMB36bn, according to the Securities Association of China. These included the RMB11.5bn A-share offering by China United Telecommunications and the RMB11lbn domestic IPO by China Merchants Bank. Its profits were also the highest in the investment banking sector, at Y05m, despite an overall decline in fund-raising on the A-share market and a fall in stock-trading turnover.
Much of CICC's underwriting success can be attributed to its excellent relations with the Chinese government, say analysts. Indeed, one of its employees is Levin Zhu Yunlai, son of Zhu Rongji.
BOCI itself is hardly short of Mainland connections, including former employees who now hold top positions elsewhere. High among them is former president Liu Mingkang, who was concurrently president of Bank of China, left in March this year to take up the post of the newly-created nation-al banking regulator. Liu's experience will be badly missed. A fluent English speaker who holds an MBA from a business school in London, Liu is one of the best-known Chinese bankers in the international banking community.
In February former managing director Lee Lam resigned, followed a month later by Henry Tsang, its head of investment banking. Tsang left to become a partner in a direct investment firm after only nine months at BOCI. He had formerly worked for Merrill Lynch for 16 years and Bear Stearns for six years, the last three as president of its Asian business. The fact that such high caliber staff left BOCI after such a short period of employment can only have had a damaging impact on staff morale.
However, none of these departures were as dramatic as that of Ho Cheuk-yuet, BOCI's former head of research. Last September, Ho published a report that recom-mended the scrapping of the Hong Kong dollar peg to the US dollar. The peg was created in 1983 to stabilise Hong Kong's currency when uncertainty over the terms of the British handover created much volatility in the territory's stock and property markets. It has been a key element of the Hong Kong government's economic policy ever since.
Ho's report triggered a bout of speculative selling that briefly forced up interest rates. Last November, when visiting the SAR for the final time as China's premier, Zhu Rongji made no effort to conceal his displeasure.
"Don't think you're just BOCI, others think that you're speaking for Zhu Rongji," he was quoted as saying during an address to Hong Kong executives of Mainland companies. "I hope none of you will make the same mistake."
Zhu said people would infer that the research reflected his views because Li Shan, the current chief executive officer of BOCT, had been his student at Beijing's Qinghua University. Shortly afterwards, the bank confirmed that the author of the report had quit his job 'for personal reasons' just a day before the premier's open criticism.
In February 2001, Ho had been the most high profile of five senior executives that BOCI recruited in an effort to boost its expertise. All five were poached from prominent foreign investment banks, giving BOCI much-needed global experience at the senior management level.
Prior to joining BOCI as its new head of research and managing director, Ho was HSBC's head of Greater China sales and research. Before then he was deputy managing director at CLSA, where he was named ?best China analyst? by Asiamoney for three consecutive years between 1994 and 1996.
Ho was by no means the only economist to call for a scrapping of the peg. Jonathan Anderson of UBS Warburg believes that Ho's report was "moderate" in tone and contained "well-laid out arguments against the peg – nothing inflammatory."
"It is a calm economic discussion that we all participate in," he says, adding that he himself had written an article about a year and a half earlier that explored the possibility of life without the peg.
The market's strong reaction to Ho's report can be put down to BOCI's status as a state-controlled firm, says Anderson. "People therefore tend to see [the report] as representing the government view," he says.
Zhu's outburst drew widespread criticism in Hong Kong, particularly since his government had repeatedly pledged to uphold freedom of expression in the SAR.
"It's a sign of the immaturity of the Mainland economy that the government cannot distinguish between fair comments of private investment banks and government policies," former investment banker, David Webb, was quoted as saying. Webb, whose own website focuses on corporate governance, said it was "a dangerous path" for the government to interfere in the analytical work of investment banks under state control.
Anderson agrees: "The [Chinese] leadership clearly didn't understand the concept of institutional independence. They should have said nothing. It's a real test of independence [for BOCI]."
By poaching top analysts from big investment banks, BOCI committed itself to assembling a reputable research team in a highly competitive marketplace. But its credibility was undermined by Ho's departure, which many believed demonstrated a lack of independence at the bank.
Campbell of BOCI London acknowledges that it was "a most unfortunate episode that we have hopefully put behind us." He has been working for the firm since January 2000 and cannot recall any other similar incident in the past.
"Every organisation has its problems," he continues. "BOCI is no exception." But he has faith in its top management. "We've got some brilliant Chinese at the top who have been trained in the West and therefore know how best BOCI should adapt in the marketplace," he says.
He explains that China's continuing strong economic growth, while much of the rest of the world is mired in recession, is the single most important factor that attracts people like himself to the bank. Before joining BOCI, he worked for the Hong Kong-based Crosby Financial Holdings.
Recognising the appeal of BOCI in the regional financial market, Anderson is sanguine about its recent troubles. It's a very competitive market. There's naturally a free flow [of professionals," he says, implying that, like any other investment banks, BOCI has to learn to handle the issue.
Paying the going rate to attract talent is one of those lessons. Back in 2000, a top-level insider at BOCI revealed that the bank spent only 22 percent of its annual budget on compensation packages, compared with 55 percent or more by the top investment banks. BOCI was reported to be lobbying the central government for allowing it to spend more to hire the best.
Chief executive officer Li Shan decided to triple bonus payouts to staff only four months after he joined BOCI in 2001. Last year, he was quoted as saying that BOCI needed to improve its pay scale to lure quality bankers and compete with its rivals. But Li, more than anyone else at BOCT, knows that there are cultural and structural conflict at play that even he may not be able to resolve in the near future.
Where BOCI positions itself in the market in future and how it goes about getting that will largely depend on the reforms in China overall banking sector changes in corporate structure and ownership, corporate culture and degree of autonomy. The person who holds the key to its future looks likely to h the national banking regulator and BOCI former president Liu Mingkang.