The world may be preoccupied with competition from China, but the countrys financial sector has so far made a dismal showing in international markets. Citic Securities Co. nearly lost $1 billion on Bear Stearns Cos. but abandoned a planned investment in the U.S. firm just before it was swallowed by JPMorgan Chase & Co. Ping An Insurance Co. was less fortunate, losing almost $3.49 billion when it bought a 4.99 percent stake in Fortis shortly before the Belgian bank collapsed in September 2008 and was nationalized. Little surprise, then, that for the most part Chinas financial giants have kept their focus on the home market.
That may be about to change, however. In November, Shanghai-based Haitong Securities Co. bought a 53 percent stake in Hong Kongs Taifook Securities Group for HK$1.82 billion ($235 million). The deal made Haitong, which plans to use Taifook as a springboard for further expansion in Asia, the first Chinese brokerage to complete a foreign acquisition.
We believe we succeeded because of our good track record and conservative approach, Jin Xiaobin, who as secretary to the board of directors is Haitongs No. 3 executive, tells Institutional Investor.
With a market capitalization of 136 billion yuan ($19.9 billion), Haitong is the countrys third-largest brokerage, behind Citic Securities and Guangfa Securities. The firm posted a 37.6 percent rise in net income in 2009, to 4.5 billion yuan. Haitong ranks second as an equity underwriter in China this year, as of mid-April, acting as book runner on $2.45 billion worth of share offerings, according to Dealogic. Taifook is Hong Kongs largest independent broker but an underwriting small-fry, ranking 54th in 2009 by handling just $24 million worth of share offerings in Hong Kong.
Haitong chose Hong Kong for its first overseas move because the city is a global financial center with an unrestricted flow of capital, says Jin. The city ranked first globally in initial public offerings last year, with 62 issues raising $31.4 billion, well ahead of Shanghais $19.5 billion and the New York Stock Exchanges $19.1 billion.
Also important is the fact that most of Taifooks 1,000 bankers are Hong Kong Chinese. Culturally we are more similar, says Hiroki Miyazato, a Japanese citizen who was born in China and joined Haitong last year as head of international business from Nikko Asset Management. It would be easier to integrate than a non-Chinese brokerage firm.
Haitong plans to turn Taifook into an offshore investment platform for its 3 million Chinese clients, anticipating that Beijing will allow its citizens to invest directly in Hong Kong before long. In addition, the merger will bring Haitong experience in margin trading and derivatives. Last month, it was one of six Chinese brokerages that won regulatory approval to begin offering margin trading and stock-index futures to its clients. Margin trading and shorting are two major developing businesses for us in 2010, says Liu Aihua, the firms deputy general manager of margin trading. So far, only 500 clients have opened margin trading accounts, but Liu expects that figure to rise to as many as 10,000 by the end of this year.
China has a whopping 107 brokerages, and more of them are expected to follow Haitong overseas, analysts say. Hong Kong is likely to be their first step. The complications that occurred in the past would be a warning to financial services companies of the dangers of expanding too far from home base, says Peter Alexander, principal of Shanghai-based financial research firm Z-Ben Advisors.
Even with a patient approach, success is far from assured. Japanese banks and brokers expanded abroad in the 1980s only to beat a hasty retreat in the 90s, notes Neil Katkov, Tokyo-based Asia head of financial research firm Celent. They relied exclusively on Japanese talent who held the reins in London and New York, he says. They didnt take advantage of international talent, which is extremely important when it comes to local relationships. I think Chinese institutions tend to do the same. Thats a potential stumbling block.