CLSA is eyeing the lucrative investment banking market in China. It hopes to team up with a local securities house on the mainland to take up a niche that the investment banking leaders have left largely unexploited: the local market. It is seeking regulatory approval to set up a securities joint venture with a local firm. CLSA's chief executive, Rodney Smyth, explains the move. "We have a strong franchise in Hong Kong and Taiwan," he says. "Going into the mainland is a logical evolution as the economies of Greater China coalesce."
Quite astutely, CLSA is positioning the proposed venture for a lead role in the domestic market rather than fight with the big boys for the dwindling opportunities to take local firms overseas. Providing an "innovative alternative" to the bulge bracket banks is how its spin-doctors describe the move.
The only investment bank on the mainland with Sino-foreign ownership at the moment is CICC, which pools the investment and expertise of China Construction Bank and Morgan Stanley. It has been increasingly active and winning lucrative mandates over the past two years as more and more Chinese state enterprises privatize and seek to raise funds in the financial markets.
CLSA's choice of partner, though, is curious. The retail brokerage, Xiangcai Securities, is a small-to-midsized establishment based in landlocked Hunan province. Chinese brokers contacted by Asiamoney do not seem particularly impressed by Xiangcai. Many say the brokerage is not particularly successful, influential or even well-known – although its executives are believed to have very good relations with the provincial authorities. One woman broker in Beijing expresses astonishment: "When we heard the news, we all said: who?"
Smyth describes Xiangcai as a "leading securities house with a distinct private-sector feel...It was chosen because we are comfortable with its culture." He declines to give indicative figures on the size or operations of the brokerage. But he says that broking will not be the "primary focus" of the venture and that it will offer a full range of investment banking services on the mainland, including public offering, underwriting and advisory work. He talks of combining CLSA's "international expertise and [Xiangcai's] local knowledge."
The application for a licence was lodged with the China Securities Commission some weeks ago. But it is anybody's guess how long reaching a decision will take. The approval time-frame of the five-year-old CICC is unlikely to shed any light. That particular venture was established in different political and economic climes and the central bank was then in charge of giving the go-ahead. A source familiar with the thinking of those involved in the approvals process says the securities watchdog is going over the submitted data with a fine-tooth comb and working out the likely ramifications of allowing the venture.
Says a bank researcher: "CLSA has had a notable recent history of getting into joint ventures at the peak of a local market's boom and then being around to take the heat as the euphoria went out of the market. It's by no means obvious that China isn't in this category."
CLSA is a Hong Kong-based entity majority owned by French bank Credit Lyonnais.