Li Shan wasted little time laying it on the line. It was April 2001, and Li, the newly named deputy CEO of BOC International Holdings, the fledgling Chinese investment bank, strode in to address 40 senior banking colleagues gathered in a conference room on the 34th floor of Hong Kong’s Bank of China Tower.
“Does everyone here understand that in best international investment banking practice there is no fixed high pay but only high bonuses based on performance?” Li thundered. “If you don’t agree or you don’t understand, leave this room right now, because I don’t need anybody who doesn’t buy this principle. You don’t deserve to be a banker here. I don’t need anybody who doesn’t have self-confidence.”
The short, bespectacled Li himself hardly lacked for self-confidence. The 38-year-old, U.S.-educated veteran of Wall Street, where he was an economist and investment banker, had never before worked for a Chinese company and had never been a manager, much less run a business. But this lack of operating experience was not about to deter Li, who put teeth in his words by announcing that he was cutting salaries by 45 percent.
No doubt many of the bankers present who had seen the Bank of China investment banking subsidiary run through three CEOs in its three-year history hoped Li, too, would exit quickly. No such luck. Instead, within six months the brash Li was named CEO by Bank of China chief Liu Mingkang and his board.
Since then Li hasn’t lost any of his fire -- or self-confidence. He has built a highly professional staff of bankers and research analysts, expanded BOCI’s operations on the mainland and won a number of impressive IPO assignments from Chinese companies. Li’s sweeping changes should help him fulfill his mandate to transform a sleepy state-owned enterprise that until recently relied on local retail brokerage and syndicated lending into a fully integrated investment house doing corporate finance, equity, fixed-income, derivatives and asset management business in Hong Kong and -- more important -- on the mainland. Li’s corporate role model: Goldman, Sachs & Co., where he worked for five years.
Beijing wants BOCI to become a world-class Chinese investment bank able to compete with Western giants like Goldman and Morgan Stanley as well as the growing array of foreign joint ventures for local deals. Beyond that, it is hoped that the firm will snare a portion of the money management and brokerage fees as China’s capital markets, already the second biggest in Asia, expand. In all, Hong Kongbased brokerage BNP Paribas Peregrine Securities estimates that the country will need some 50 trillion yuan ($6 trillion) in capital by 2010 to meet its development needs. The opportunity isn’t just a distant hope: About $28 billion in Chinese IPOs were completed last year -- roughly $500 million more than the volume offered at the New York Stock Exchange.
BOCI brings to this competition some clear advantages, not least of which are its close ties to the mainland economy, thanks to its parent, the government-owned Bank of China, the country’s second-biggest bank, with $351 billion in assets and nearly 13,000 branches. “It gives us lots of clout: the capital, the brand, the franchise. We have a beautiful position in this market,” says Li. “A Chinese investment bank has an advantage on the mainland because they speak the language, understand the culture.”
In less than two years, Li’s newly polished and efficient sales, trading, research and corporate finance teams have won significant mandates -- including the joint leadership role for the $448 million February IPO for Sinotrans, China’s biggest logistics company -- that have moved it within the top half-dozen or so underwriters of local and foreign deals. Li lobbied Beijing for a mainland investment banking license and snapped up Hong KongMacau Securities, a stock brokerage with offices in Beijing, Shanghai and Shenzhen that hastened BOCI’s entry into China.
But obstacles abound. Li must find the resources to recruit top bankers and push deep into the mainland. Then there are the political risks. BOCI’s close ties to Beijing cut both ways. Last year thenChinese premier Zhu Rongji publicly rebuked BOCI for an economic research piece suggesting that the future of Hong Kong’s currency peg to the dollar, a sensitive issue, might be open for discussion. Zhu’s concern? That clients would think that BOCI, with its government ties, was speaking for Beijing. The flap prompted rumors that Li was about to join his three predecessors in making a quick exit from BOCI and has undercut his efforts to remake the bank.
Li also must convince Beijing-based Bank of China’s senior management, many of them political appointees and former government officials, to provide him with the wherewithal to compete against huge Western banks. It’s not an easy sell: Investment bankers at BOCI already earn roughly 30 times the paltry $3,600 annual average their mainland commercial banking counterparts make. Li finds himself in the awkward position of needing money to recruit bankers from Western firms that pay several times what his own staff takes home.
“BOCI can fail dramatically or succeed massively,” says the head of China banking at a big U.S. firm. “If Bank of China doesn’t allocate sufficient resources, they will certainly fail.” Adds a Hong Kongbased executive at a major European bank: “Will Beijing allow for management stability? The record is not good, because there already have been four CEOs in less than five years. I don’t believe that today you can build up an investment bank from scratch. For those guys to try this from nothing is almost impossible.”
Li, who proposed the creation of a Chinese investment bank to Zhu back in 1997, concedes that the odds are against him. “When BOCI made an offer to me, many of my friends said, ‘Don’t go, it’s mission impossible.’ But I enjoy taking on the mission impossible.”
LI HAS BATTLED LONG ODDS BEFORE, BEGINNING with a compromised political background. His father had only a primary school education, and his mother was branded a rightist by Communist Party leaders during Mao Tse-tung’s Cultural Revolution and sent to the Sichuan countryside in Weiyuan County for political rehabilitation. A gifted student, Li overcame the family stigma and quickly gained notice. He became the first child from Weiyuan to attend Beijing’s elite Tsinghua University, where virtually all the country’s top leaders are educated and where future premier Zhu was then the honorary dean. Li received his degree in 1986 and won a scholarship to study at the University of California, Davis, where he earned a master’s degree in economics.
In 1988 he enrolled in the Ph.D. program in economics at the Massachusetts Institute of Technology, where he stood out. Li, recalls his former professor Oliver Hart (now at Harvard University), was “impressive and charming from the beginning.” He received his doctorate in 1993, and an abstract from his dissertation, comparing failed American conglomerates of the 1960s with Japan’s then seemingly more successful keiretsu, was later published in the prestigious Journal of Finance.
Li traded in his academic credentials for a Wall Street career. He worked for six months as a foreign exchange trader at Credit Suisse First Boston before joining Goldman as an international economist. He moved to Hong Kong with Goldman in January 1995 and switched to investment banking 18 months later. Goldman sent him to London in October 1997, where he worked as an executive director in investment banking for just a few months before leaving for Beijing.
Robert Giordano, a retired Goldman partner and director of economic research who hired Li in New York in late 1983, recalls him as “extremely bright, an excellent economist, motivated to succeed and with a superior work ethic.” When he first met Li, over breakfast in Boston, Giordano says he “noticed immediately someone with genuine humility and respect and with bright and alert eyes -- sort of a peaceful confidence about him.”
Giordano says his most lasting impression of Li is that he “came penniless to study in the U.S. and ended up earning his Ph.D. in economics at one of our best universities.” Clearly, he says, Li had a special bond with his homeland. Before Li had “enough money to even secure all the creature comforts for his family, he established a scholarship for children from his village.”
Deeply patriotic, Li resented watching American investment banks like his own employer walk off with most of the underwriting fees as Chinese companies began to go public in overseas markets in the late 1990s. “It was not right to let the U.S. houses monopolize this,” says Li, who wrote to his old dean Zhu urging him to set up an investment bank through an existing Bank of China unit in Hong Kong. Li argued that if, as expected, China was accepted into the World Trade Organization (as it ultimately was in late 2001), its poorly capitalized and managed investment banks would be fodder for Western competitors, which he predicted would arrive on the mainland within five years.
Zhu invited Li to Beijing to become deputy head of a new preparatory committee that he planned to set up under former People’s Bank of China deputy governor Chen Yuan to review the idea. Li resigned from Goldman in April 1998, about a year before it went public, and says he gave up “millions of dollars [in IPO proceeds] to serve my national interest.”
Li might have been wiser to take the money. A year later he quit the committee in frustration over its seemingly endless decision-making process, taking a job in Hong Kong as head of Lehman Brothers’ China investment banking unit. But in February 2001 he got an unexpected call from Bank of China chairman Liu, one of the country’s most respected financial reformers, who had been put in charge of the bank a year earlier. Liu asked Li to become BOCI’s deputy CEO.
Li quickly discovered a world of difference between American investment banking standards and those of a subsidiary of a huge, state-owned commercial bank. BOCI staff routinely left their desks at 5:00 or 6:00 p.m., and no one came in on weekends, he recalls.
More alarming, however, was the precarious state of BOCI’s two key businesses, a local retail brokerage and a loan syndication operation. It turned out that both depended almost entirely on the largesse of another Bank of China unit, Bank of China Hong Kong (Holdings). The local bank directed brokerage business from its branches to BOCI and then split the fees. It also handed off syndicated loan work it could have handled itself. But BOCHK was slated to go public in 2002 and needed to bring most of these two revenue streams back in-house.
BOCI, which analysts estimate made a profit of more than $45 million on revenues of roughly $500 million in 2001 (as a private entity the company does not disclose financials), was facing serious shortfalls. “At least 80 to 90 percent of the existing revenue was disappearing when I took over” as CEO, says Li.
Li moved quickly and decisively. He laid off 25 percent of the roughly 450-person BOCI staff in late 2001 (by the end of 2002, he had fired a total of 230 original employees) and started an aggressive recruitment campaign to replace them with proven rainmakers in equity and related derivatives products and corporate finance, most of whom were working at Western firms. At the same time, he began to build a credible equity research department.
Because he couldn’t pay competitive salaries, Li sold recruits, mostly Hong Kong Chinese, on the opportunity to create a world-class investment bank focused on China. “All of us who joined are looking for some kind of challenge outside of pay,” says Anthony Lok, a 33-year-old Hong Kong native and banking analyst from Nomura Securities who was contemplating giving up research for teaching when Li came calling early in 2002.
One of Li’s priorities was creating an institutional distribution network from scratch, explains Neil Ge, a former consultant to Deutsche Bank’s CEO for Asia. Ge, 44, has worked for a number of Western investment banks and joined BOCI in the middle of 2001 as head of equity. He says the firm, with about two dozen institutional salespeople, now has some 100 clients worldwide. Li proudly points to the investment bank’s performance on the international tranche of Bank of China Hong Kong’s $342 million public offering in Hong Kong; BOCI sold 28 percent of the institutional book, the same percentage as Goldman and UBS. Admitting that its ties to Bank of China Hong Kong gave it “some advantage,” Li says that nonetheless, investors “wouldn’t buy shares from us just because we are BOCI. That’s the first time we showed our competitiveness.”
Under Li the research department has doubled in size, to about 34 analysts who cover 80 Hong Kong and 90 mainland companies.
Li fortified his corporate finance team with the appointment of Henry Tsang, former head of Bear Stearns Asia and a prolific deal maker at Merrill Lynch Asia Pacific for 16 years, as head of investment banking in May 2002. Tsang, 48, was best known for winning Bear Stearns the role of global coordinator and joint lead manager on the IPO of China Mobile (Hong Kong). In short order Tsang and Li pulled off a “considerable feat,” says a rival. Aside from its role on Bank of China Hong Kong, the firm has gotten mandates for several pending deals, including Ping An Insurance’s global IPO and China Aviation Industry Corp.'s Hong Kong listing; a co-management slot on Huaxia Bank’s IPO; and an advisory position on Fujian-based Industrial Bank’s A-share listing.
Just as important, the more diversified bank survived 2002 without a lot of the revenue handouts from BOCHK. Although analysts believe BOCI’s revenues and profits dropped sharply, new growth areas, such as derivatives, allowed it to stay profitable.
DESPITE ITS GAINS IN HONG KONG, LI believes BOCI must establish itself on the mainland if it is to survive. “If we just stay in Hong Kong, there is no chance,” he says. “It is an open market, and we cannot compete. We have to take advantage of the closed China market to build up until we get ready for when it is opened.” To date, two foreign banks, BNP Paribas Peregrine Securities and CLSA Emerging Markets, have opened joint ventures on the mainland, and more, including Deutsche Bank, are expected to follow. As greater foreign control of these ventures is allowed in the next few years, the number of major firms operating in China is anticipated to grow even more quickly.
Li saw this competition coming and lobbied Beijing to grant BOCI a domestic investment banking joint venture license, which it received in November 2001. Li got BOCI a better deal than the Westerners received. Because its Hong Kong base makes it a foreign player, BOCI should have been allowed a 33 percent ownership stake and been barred from stockbroking, as other foreigners were. Instead, Li was permitted a 49 percent ownership share and a brokerage license. The joint venture, Shanghai-based BOCI International China, with $180 million in capital, was formally established in March 2002 and has already received a number of domestic underwriting assignments.
Just a few months later, Li bought Hong KongMacau Securities, a 20-branch brokerage with offices in eastern and coastal cities, including Beijing, Shanghai and Shenzhen, to accelerate its push onto the mainland. The deal added 400 staff, bringing BOCI’s head count to about 1,000. More important, the acquisition gave BOCI instant access to China’s fast-growing A-share market.
Because he is building global distribution and execution capabilities by opening offices in London and Singapore to complement the firm’s Hong Kong activities, Li believes his firm will eventually supplant China’s leading local deal maker, China International Capital Corp., a Morgan Stanley joint venture with China Construction Bank, the country’s third-biggest bank. “I tell my people we have to beat CICC. They have experience. They have done all the deals in China. So it’s a good target for me to build up my team.” He is quick to add that his longer-term “mission is to beat Goldman Sachs” on international mandates and, once his former firm can operate more freely in China, on domestic deals.
To win a leading role -- particularly on the mainland -- will require help from Bank of China and Beijing’s leadership, which may prove more difficult than revamping BOCI’s Hong Kong business. The fragility of these relationships was underscored in August 2002, when thenresearch head Ho Cheuk-yue, a well-regarded analyst who’d run CLSA Emerging Markets’ respected research unit in the 1990s, released a 60-page report on structural problems in Hong Kong’s economy and the challenges it faced as it integrated with the mainland. The straightforward study caused not a stir until mid-September, when a South China Morning Post reporter spotted comments buried on page 31 of the report in which Ho addressed the Hong Kong dollar’s linked exchange rate system. The long-held government argument that Hong Kong was in a strong position to defend the peg to the U.S. dollar, wrote Ho, “was being weakened by the day . . . because of its track record of fiscal indiscipline [namely, three budget deficits in five years].” He added that “discussion on changes to the currency regime is no longer a taboo among the top leadership in China. The relevant issue for [Hong Kong] policymakers is then the perceived costs and benefits of delinking.”
Although the newspaper reported Ho’s conclusion that abandonment of the peg was unlikely, the markets took BOCI’s view to be a reflection of a shift in Beijing opinion. Hong Kong dollar forward rates spiked upward briefly after the story appeared.
But that was just the start. In late November then-premier Zhu, on a visit to Hong Kong, said that President Jiang Zemin himself had inquired about the BOCI research report. Zhu lashed out at the firm. “On the mainland everyone can express their opinion,” he told a business group. “However, you have to consider your special status. Don’t think you’re just BOCI; others think that you are speaking for Zhu Rongji. I hope all of you will not make the same mistake again.” In what BOCI insiders insist was coincidence, Ho, who had been with the firm only a few months, resigned the day before Zhu made his speech.
It got worse. Four days later the Hong Kong Economic Journal reported that Bank of China, which has been embarrassed by revelations about a major lending scandal in its New York office as well as a $500 million embezzlement from a branch in Guanxi province in the past two years, was evaluating “the management style of chief executive Li Shan.” Bank of China said the review was routine, although most observers said it was highly unusual.
Speculation swirled that Li’s days at BOCI were numbered. Li, say his aides, refused to criticize Ho or to compromise the bank’s research but instead wrote a self-criticism blaming his own mismanagement for the problems. Although Li has successfully quelled the rumors of his exit, he must now figure out how to balance clients’ information needs against Beijing’s sensitivities.
“The market perception is that we have special connections and are an insider,” says equity chief Ge. “It’s going to take time to change that.”
The fallout from the incident continues. In mid-March, a year shy of his two-year commitment to BOCI, Tsang, the popular head of investment banking, quit to become a partner at a private equity firm. “The morale of this company was very good until the research incident,” says one of Tsang’s former colleagues who has remained at the firm. “Now we live under a shadow, and Henry left because of this shadow.” David Cheng, 38, previously head of corporate finance under Tsang, has succeeded him.
More unsettling news arrived in March: Bank of China chairman Liu, who had hired Li and supported his reforms, stepped down to take charge of the newly established China Banking Regulatory Commission. Now Li, in addition to his other trials, needs to win the confidence of a new boss, Xiao Gang, the 45-year-old former deputy governor of the People’s Bank of China.
EVER THE SELF-CONFIDENT LEADER, LI BELIEVES HE has emerged from his recent crises stronger than before. He has gone from being “the bad guy” who scared his bankers in 2001 to being “the leader of a team who is a good guy.” Li’s position has been further solidified, says a BOCI executive, by the findings of Bank of China’s evaluation, which showed that the staff of BOCI strongly supported their CEO.
Among foreign investment bankers in Hong Kong, however, there is skepticism about Li’s -- or anyone’s -- ability to serve so many masters. “It is hard enough for investment bankers to work with commercial bankers anywhere in the world,” says a senior executive with a European investment bank. “Add to that a Beijing headquarters insulated from the marketplace and driven by politics, and what you have is a very, very complicated situation.”
Still, there has been some encouragement from new Bank of China boss Xiao. In June he asked BOCI to speed up its transformation so that it could act as a “shining example” for the whole bank. Li is more than willing to heed his call. “I love the challenge,” he says. “The Chinese say a hero can only prove himself in a volatile ocean.” These seas are certainly rough.
BOCI’s money management unit proves partnerships can work When Li Shan wrote to thenChinese premier Zhu Rongji in 1997 to urge him to back a Chinese investment bank (story), he argued against forming a joint venture with a foreign partner. That route, he believed, would lead to conflicts of interest, as he felt it had at China International Capital Corp., the joint venture that China’s third-largest bank, China Construction Bank, and Morgan Stanley created in 1995. Morgan Stanley holds a 34 percent stake in CICC but often competes against its own affiliate for mandates from Chinese companies planning overseas equity deals.
After nearly two years running BOC International Holdings, Li has changed his view of foreign partnerships. Why? He has seen the benefits his state-owned enterprise has reaped from its money management partnership, BOCIPrudential Asset Management, a four-year-old joint venture with U.K. insurance giant Prudential. Among them: more independent management and the ability to offer world-class compensation.
Performance isn’t too bad, either. The combination of Prudential’s investment management expertise and BOCI’s superb corporate contacts in Hong Kong gave the joint venture an edge when the city started its pension system, the Mandatory Provident Fund, three years ago. Since its inception BOCI-Prudential has been the third-biggest recipient of local employees’ monthly contributions (all workers making more than $513 a month must allocate at least 5 percent of their salaries to be invested by one of 19 approved money managers). In all, it has taken in roughly $641 million from the MPF. Before pairing up, BOCI, which owns 36 percent of the joint venture, didn’t manage money at all, and Prudential, which holds 64 percent, ranked in the second tier of local managers.
Although its $2 billion in total assets is paltry by global standards, the partnership’s rising stature in Hong Kong testifies to the power of BOCI’s connections: 80 percent of the money has come from clients of Bank of China Hong Kong (Holdings), the local commercial banking unit of Beijing-based Bank of China and sister company to BOCI.
BOCI-Prudential CEO Oscar Wong estimates the joint venture will snag $500 million more this year, most of it for guaranteed-return mutual funds, which invest in fixed income, where 90 percent of the firm’s assets are deployed. Although it returned 3 percent, BOCI-Prudential posted the third-best performance among the 19 firms in Mercer Investment Consulting’s index of Hong Kong MPF managers from the benchmark’s creation in January 2001 through March 2003 .
Li is determined that BOCI build an asset management business to serve mainland China’s 1.2 billion people (and $1 trillion-plus in savings), but he’s not sure what form it will take. The chance to tap into parent Bank of China’s mainland presence is too alluring to resist.
BOCI-Prudential would like to participate in Li’s foray, “but we still haven’t made much progress,” says Wong. One snag: Because BOCI is based in Hong Kong, it is considered a foreign company, which means it is limited to a 33 percent stake in any joint venture fund management firm on the mainland. “Why should we do 100 percent of the work for 33 percent of the economic interest?” asks Wong. Another problem is that banks are barred from the asset management business in China, so BOCI’s huge parent can’t invest in a new entity.
Until it works out a solution, BOCI’s foreign partnership, which has turned a profit in each of the past two years, will continue to focus on Hong Kong. The firm receives about $25 million in new MPF cash each month, supplementing the $700 million in local corporate provident funds and $650 million in mutual funds that its six fund managers, seven analysts and three traders also oversee. -- K.H.
