Page 1 of 2

Future of Finance

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.