In the same way, the Chinese have recently discouraged Wall Street firms from taking a slice of the action in the booming Chinese stock market, where the typical P/E ratio is, what, 40 to 50 or somewhere thereabouts. Unsurprisingly, Wall Street has been looking on excitedly at the prospect of participating in Chinese equity bourses. Given the requirements of the WTO General Agreement on Trade in Services (GATS), a degree of financial services liberalization would be expected. While Goldman Sachs and UBS were able to obtain minority stakes in publicly-held brokerages, later would-be entrants are finding more obstacles being put in their way. The access of financial service providers to the Chinese market is a point of growing contention between the US and China. (I've related the very high minimum requirements for obtaining a license to deal in RMB elsewhere.)
US Treasury Secretary Henry Paulson has been pressing the matter of financial services access in China with his counterpart, Vice-Premier Wu Yi. She had initially expressed that China would explore opening up of its financial sector more, but it appears China is now backtracking to go by this Bloomberg article. I cannot help but attribute this move to the general souring of US-China trade relations over subsidies, dumping, and intellectual property violations. IMHO, it's China's way of getting back at the US for applying those measures against China. In the no-!@#$ sweepstakes, expect haggling over access to Chinese financial services to be the next trade flashpoint between the US and China:
China may prevent foreign investors from taking control of domestic brokerages, a setback to Wall Street's ambitions to tap the world's fastest-growing stock market, people familiar with the planned rules said.Overseas companies will be limited to owning stakes in publicly traded brokerages, with the foreign holding capped at 20 percent, said the two people, asking not to be identified before the rules are approved. The China Securities Regulatory Commission has submitted the draft rules to the State Council, the nation's highest decision-making body, they said.
Goldman Sachs Group Inc. and UBS AG are the only global securities firms that control investment banking units in China, where 47 million new stock trading accounts have been opened this year. The new rules would prevent rivals such as JPMorgan Chase & Co. and Merrill Lynch & Co. from obtaining controlling stakes in the nation's brokerages.
This is ``a step which will limit foreigners' ability to take control of a broker in the same way as Goldman Sachs, UBS,'' said Tim Ferdinand, vice chairman of Euro Securities Ltd., the Chinese investment banking venture of CLSA Ltd. ``Foreign investment banks will have to accept that the Chinese are not going to open their financial markets quickly.''
China only allows domestic brokerages to trade shares, so direct investment by foreign companies is they only way they can tap that trading revenue.
There are 125 million trading accounts in China. In the U.S., brokerages manage more than 83 million accounts with total assets of $3.85 trillion, according to 2006 statistics from the Securities Industry and Financial Markets Association.
Chinese Vice Premier Wu Yi pledged during a May meeting with U.S. Treasury Secretary Henry Paulson to open China's securities industry to overseas firms. China said it would stop taking applications for new investment or licenses in September last year, saying domestic securities firms needed time to get ready for competition.
``UBS and Goldman were special cases,'' said Liang Jing, a Shanghai-based analyst at Guotai Junan Securities Co. ``The restriction of licenses doesn't meet the general expectation of a full-scale opening up when one uses those two foreign investment banks to compare.''
Liu Fuhua, a Beijing-based spokesman at the CSRC, declined to comment. Spokespeople at JPMorgan and Merrill Lynch in Hong Kong also declined to comment.
Previous investments in Chinese securities firms were made by special arrangement with regulators.
While foreign ownership of Chinese brokerages will be capped at 20 percent, overseas firms can hold as much as 33 percent of their investment banking ventures with Chinese partners, the people said.
That will allow them to directly engage in underwriting stock and bond sales, the people said, adding the ventures may be granted brokerage, asset management and advisory licenses over time. No deadline was given for extending licenses.
Morgan Stanley helped set up China International Capital Corp. 11 years ago, taking a 34 percent stake in the nation's first investment bank. The New York-based firm surrendered management responsibilities at CICC in 2000 following a dispute with the Chinese company's management.
UBS AG, Europe's biggest bank by assets, won approval last year to set up UBS Securities Co. The Zurich-based firm holds a 20 percent stake in the company it bought for $210 million. UBS said in September 2005 that it will manage the firm.
Goldman has a 33 percent-owned investment banking venture with Beijing Gao Hua Securities Co. Goldman loaned about $100 million to mainland banker Fang Fenglei to set up Gao Hua. Goldman's Hong Kong-based spokesman Edward Naylor said the firm doesn't disclose details of the arrangement.
UBS and Goldman are the only foreign investment banks that have underwritten domestic stock sales this year, according to Bloomberg data. Goldman helped arrange Ping An Insurance (Group) Co.'s $4.2 billion Shanghai share offering in February.
The new rules at least set a level playing field for new entrants, CLSA's Ferdinand said.
``What was very frustrating for foreign investment banks was that nobody knew who was going to be next to be given a special exemption,'' he said. ``Nobody knew what to propose to the CSRC in order to get such a special exemption.''
The nation's booming market for stocks has made the shares of Chinese brokerages, including Citic Securities Co., more expensive. Citic, the world's fourth-biggest securities firm by market value, reported in August first-half profit jumped more than five times from a year earlier. Trading commissions contributed 62 percent of sales, while its underwriting business accounted for only 4.4 percent.
Citic's market value has risen to 320 billion yuan ($43 billion) today from 10.5 billion yuan in March 2005. Its stock price of 96.71 yuan values the company at 34.8 times estimated earnings for this year, compared with 9.48 times for Goldman Sachs.
China's stock markets have almost tripled in size this year. The $3.37 trillion value of the companies traded in Shanghai and Shenzhen trails only London, Japan and New York, according to data compiled by Bloomberg.
The Financial Times earlier reported China planned to allow investments of as much as 20 percent in existing brokerages. Buying into a failed, closely held securities firm would allow foreign investment banks to negotiate for management control.
``It's going to be easier for the regulators to control the foreign shareholder if the company is a publicly listed company,'' Ferdinand said. ``There's not a lot of opportunity for behind-the-scenes deals.''
