July 14, 2008 -- After nearly a three-year break, foreign firms resumed their China expansion plans last month. Credit Suisse won approval for a new joint venture, CLSA won approval to expand an existing joint venture, and Deutsche Bank applied for permission to open a joint venture.

The Credit Suisse joint venture investment bank, announced by the company on June 14, is the first foreign brokerage joint venture approved since the lifting of a two-year moratorium in December 2007.

The joint venture will be 33.3 percent held by Credit Suisse, the maximum legally allowed for a foreign investor, and 66.7 percent held by Beijing-based Founder Securities. Credit Suisse will invest 266.4 million yuan ($38 million) while Founder Securities will invest 533.6 million yuan ($76.2 million), according to the state-owned Xinhua newswire.

"In Founder Securities we've found a partner who commands strong local knowledge, and truly believes the potential of our combined strength," Sheel Kohli, Credit Suisse's Asia Pacific head of corporate communications, told Emerging China. "We also feel that their corporate culture fits well with ours."

Credit Suisse and Founder Securities will launch the joint venture "by the end of this year," said Kohli. The newly-established company will sponsor and underwrite yuan-denominated listings, foreign listings, and government and corporate bonds, Credit Suisse said.

One reason regulators have resumed opening up China's securities market is that they recognize that foreign firms have skills that local companies need.

"Financial services in China are grossly lacking in expertise, especially in securities companies," Fraser Howie, co-author of Privatizing China, told Emerging China. "With joint ventures, they [Chinese companies] get the technology transfer without losing the control. It's an immediate way to grow the business and bring in some foreign talent."

Those in the securities business "can't afford to not to be in China," Howie said. With joint ventures "you get a stake in the game, and then you're at least in a position to comment, to get involved, to change, and to expand." And if the rules change, companies with joint ventures already established in China have a leg up over those starting from scratch, Howie added.

EXPANDING OPERATIONS

China Euro Securities Ltd. -- the CLSA joint venture -- received brokerage and financial advisory licenses, the company announced on June 16. The new brokerage license allows the joint venture to broker yuan-denominated listings trading on the Shanghai and Shenzhen stock exchanges.


The brokerage license is limited to operations in Shanghai and surrounding region.

The new licenses are the first issued after regulators eased restrictions last December. At that time the China Securities Regulatory Commission ruled that joint ventures operating in China for more than five years, and which met certain additional requirements, would be eligible for domestic brokerage licenses. They were previously restricted to brokering dollar-denominated listings and yuan-denominated bonds.

Other firms have also acted quickly to take advantage of the new regulatory environment.

Frankfurt-based Deutsche Bank AG applied for an underwriting license through a joint venture with China's Taiyuan-based Shanxi Securities in late June.

"The principal scope of the joint venture will be underwriting and the sponsorship of debt and equity," said a senior manager at Deutsche Bank who declined to be identified as he was not authorized to speak to the press on this issue. He declined to comment on the potential size of the investment.

Shanxi Securities currently has 28 branches, with 20 of those located in Shanxi province and the remaining branches in Beijing, Shanghai, and a number of other second-tier cities around China.

Deutsche Bank's application comes at a time when it is making substantial new investment in China. The company formally incorporated as Deutsche Bank (China) Co., Ltd. on January 2, increased its stake in Beijing-based Harvest Fund Management from 19.5 percent to 30 percent on January 30, and increased its stake in Beijing-based Hua Xia Bank from 9.9 percent to 13.7 percent on March 19.

Deutsche Bank's operations currently include cross border investment banking, retail banking, asset management, private wealth management, transaction banking, and trade finance services.

"The opening up of the capital market has a positive effect in introducing management techniques, promoting competition and innovation, improving market services, promoting market development, and improving China's securities business organizations international competitiveness," the CSRC said in a report issued on June 15.

"However, international experience shows that opening up too quickly could potentially lead to financial risks, and negatively impact the formation of the capital market," the report said.