WHEN LIN YONG CAME TO HONG KONG IN 2007 TO OPEN the
first overseas operation for Haitong Securities Co.,
China’s second-largest brokerage by market value, he
brought a draft check for HK$50 million
($6.5 million) and two assistants. It wasn’t nearly
enough. Many of Haitong’s mainland clients ignored the
offshore unit because it lacked the scale, experience and range
of products and services of its international rivals.
Realizing that Haitong would have to make a bold move to
gain an offshore foothold, Lin in 2009 led the firm’s
$345 million takeover of Taifook Securities Group, then
Hong Kong’s biggest locally owned brokerage. It was the
largest-ever foreign acquisition by a Chinese securities firm
and made Haitong the first Chinese institution to have a
full-scale offshore trading platform capable of underwriting
bond and equity offerings, and providing M&A advice to
clients.
“The best way to grow is through mergers and
acquisitions,” Lin, now CEO of the firm’s Hong
Kong–listed subsidiary, Haitong International Securities
Group, tells Institutional Investor. “To build
Taifook’s operations in Hong Kong would have taken us ten
years.” As it is, growth with Taifook has been less than
spectacular. Haitong ranked a modest No. 14 as an equity
underwriter in Asia ex-Japan in the first half of this year,
arranging seven initial public offerings worth a total of
$509 million, according to data provider 
Dealogic.
The Hong Kong subsidiary generated 5.8 percent of
Haitong’s 9.3 billion yuan ($1.5 billion) in
revenue last year and 2.8 percent of its 4.4 billion yuan
of pretax profits. Lin is undaunted, though. He aims to make
Haitong one of the ten largest global investment banks, a goal
he figures will take a decade or two — and more
acquisitions — to achieve. “We definitely will be
looking at the global markets, and all possibilities
remain,” he says.
China and its leading banks and brokerages are bound to play
a bigger role in international finance in coming years, but as
Haitong’s experience demonstrates, progress is likely to
be much slower than the country’s economic clout suggests.
China has the second-largest and fastest-growing economy in the
world. It sits on an unprecedented $3.2 trillion of
foreign currency reserves. Four of the top ten banks in the
world by market capitalization are Chinese. But despite all
those resources, China’s financial services giants have
taken only the wariest of baby steps into the global
marketplace. The Taifook deal was a rare foreign acquisition by
a Chinese financial firm; most earn only a tiny fraction of
their income overseas.
The caution of these institutions reflects the attitude of
the Chinese government, which still owns majority stakes in the
largest banks and brokerages. Sources say the Chinese
Securities Regulatory Commission has made it clear to industry
executives that it might reject sizable overseas acquisitions
because of concern that they could entail systemic risk. Some
early missteps have made Chinese officials leery of rapid
foreign expansion. China International Corp., the
country’s big sovereign wealth fund, made
multibillion-dollar investments in Blackstone Group and Morgan
Stanley in 2007, only to see the value of those stakes plunge
when the financial crisis hit. Shenzhen-based Ping An
Insurance (Group) Co. of China bought a 5 percent stake in
Fortis in 2007 and had to take a $2.3 billion write-off
after the crisis devastated the Belgian-Dutch banking and
insurance group.
As a result, Beijing is moving to its own timetable and is
determined to control the financial sector’s development
to make sure it meets the country’s domestic requirements.
China needs a more dynamic financial sector to help its economy
shift from an export-oriented model to one driven more by
domestic consumer demand, and Beijing has taken several steps
recently to accelerate financial liberalization. But officials,
mindful of the excesses that sparked the global crisis, remain
wary of an unbridled financial sector and are being careful to
move step-by-step — “crossing the river by touching
the stones,” as former leader Deng Xiaoping put it.
“China doesn’t have the ability to replace the
U.S. and claim global financial hegemony,” says Gary Liu,
executive deputy director of the Lujiazui Institute of
International Finance at the China Europe International
Business School, which advises the Shanghai government on
financial reforms. “China has too many domestic issues and
challenges to overcome, including necessary political and
administrative reforms, before it can even lay claim to having
a globally competitive financial domestic
marketplace.”
The same cautious approach extends to Beijing’s
international financial policy and the management of its
prodigious reserves. China is the biggest holder of
U.S. Treasuries, with some $1.2 trillion, and
should have a keen interest in diversifying its portfolio, but
its leaders know they have a lot to lose if their actions
destabilize markets. They also don’t want to see
China’s economy whipsawed by a rapid rise in the renminbi,
after watching a strong yen damage Japan over the past two
decades.
So Beijing has moved creatively to increase the
international use of the renminbi while maintaining strong
control over the exchange rate. China has promoted the renminbi
as a trade settlement currency in deals with mostly Asian trade
partners and encouraged the rise of an offshore renminbi bond
market in Hong Kong. Beijing is also eager to foster
South-South capital flows with Brazil, Russia, India and South
Africa, and has suggested that the so-called BRICS nations set
up their own development bank to lend to emerging markets, in
competition with the World Bank. At a China-Africa summit
meeting in Beijing in July, Chinese officials offered some
$20 billion worth of soft loans for various infrastructure
projects in Africa over the coming three years, double the
amount extended at the previous summit, in 2009.
China’s long-term ambition is to promote a sort of
Beijing Consensus: a multipolar world in which new political
and financial powers, including the Chinese, help set the
rules, says Laurence Brahm, an American lawyer and entrepreneur
based in Beijing who advises China’s State Council on
international affairs. Unlike the so-called Washington
Consensus, the U.S.-driven agenda that offered developing
nations support from the World Bank and International Monetary
Fund in return for market-oriented policy reforms, China’s
model provides loans to and massive infrastructure investments
in emerging markets in exchange for resource extraction
rights.
“In the past the U.S. ruled the world through the
Washington Consensus, where all major global decisions,
political and financial, were either made in Washington or had
to have tacit approval in Washington,” says Brahm.
“Those days are over.”
DESPITE ITS DRAMATIC SUCCESS OVER THE PAST TWO decades,
when growth averaged 10 percent a year, China’s
investment-driven economic model is showing signs of
strain. In the aftermath of the global financial crisis, the
government and state banks pumped more than 12 trillion
yuan into the system to sustain rapid growth. Much of the money
went into investments in infrastructure and real estate,
causing urban property prices to quadruple between 2009 and
2011. Investment now accounts for 48 percent of China’s
economic output, while domestic consumption, the main driver of
advanced economies, has fallen to just 40 percent.
“The Beijing Consensus simply doesn’t exist if we
cannot build an economically sustainable growth model,”
says Liu Mingle, an independent analyst and former executive of
the People’s Daily group, the flagship publisher of the
Communist Party.
With growth slowing amid global economic uncertainty, China
must accelerate financial market reforms so that more credit
goes to private sector investments than to white-elephant
public sector projects, says Guan Anping, a Beijing-based
securities lawyer and a former aide to Wu Yi, who was vice
premier from 2003 to 2008.
“China needs a financially competitive landscape and
sustainable capital market system before it can even think
about challenging the U.S. in global finance,” says
Guan.
The government has announced nearly a dozen liberalization
moves since December, shortly after Premier Wen Jiabao
appointed Guo Shuqing, a reformer and a longtime chairman of
China Construction Bank, to head the CSRC. These measures
include:
• Authorizing private lenders to operate in
Wenzhou, a coastal city known for its entrepreneurial culture
and informal lending networks. Before this experiment only
government-approved banks could legally make loans, most of
which have gone to big state-owned enterprises rather than
small and medium-size businesses.
• Allowing banks to raise deposit rates to 110
percent of the benchmark for one-year deposits and to lower
lending rates to 70 percent of the one-year benchmark. This is
a first step toward interest rate liberalization, which
officials hope will lead banks to allocate capital to the areas
of the economy that need it most.
• Creating a high-yield bond market to allow
small, unlisted companies to raise funds through private
placements.
• Doubling the permitted daily trading band for
the renminbi–U.S. dollar exchange rate, to plus or minus 1
percent — the first time since 2007 that Beijing has
increased currency flexibility.
• Expanding the quota for qualified foreign
institutional investors, the main vehicle by which foreigners
can buy Chinese stocks, from $30 billion to
$80 billion.