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Deutsche Bank securities JV with Shanxi Securities gets China approval

The license allows Zhong De Securities to underwrite A-shares and domestic Chinese bond issues.

Deutsche Bank announced yesterday that its joint securities venture with Shanxi Securities has received a business license from the Chinese regulators, meaning it is now free to launch investment banking services targeted at the domestic Chinese market. The license was granted about six months to the day after the two firms got the approval to set up the JV and makes Deutsche the fifth international bank to gain access to China’s equity and bond markets after CLSA, Goldman Sachs, UBS and Credit Suisse.

In accordance with the prevailing Chinese regulations, Deutsche owns 33.3% of the Beijing-based JV — named Zhong De Securities — while Shanxi Securities owns the remaining 66.7%. The business license allows Zhong De to underwrite and sponsor Chinese A-share issues, as well as government and corporate bonds, but not to conduct brokerage operations. It is believed that the new firm will initially focus on large-scale equity issues, but in the longer term it is likely that Zhong De will want to take advantage of Deutsche’s expertise in the international bond markets and get more involved in China’s rapidly growing corporate bond market as well.

Stock broking is one of the most profitable areas of the securities business in China, but new regulations issued in December 2007 stipulate that Sino-foreign securities JVs will have to wait five years after their establishment to obtain an A-share brokerage license.

Deutsche Bank’s head of China corporate finance, Charles Wang, has been appointed CEO of the JV, while Shanxi Securities’ president, Wei Hou, will become chairman. Wang is an experienced investment banker who has been with Deutsche bank for three years. Before that he spent 12 years with Merrill Lynch. During his career he has focused primarily on equity and advisory, which reinforces the suggestion that Zhong De’s initial focus will be on A-shares.

Deutsche will nominate three members to Zhong De’s nine-person board of directors, including Wang and one independent director. Shanxi Securities will nominate the other six, which will include the chairman and two independent directors.

While current Chinese regulations caps the investment by foreign banks in a Sino-foreign securities JV at 33% and direct stakes in a securities firm at 20%, the international banks are all striving to get as much management influence as possible. While abiding by the ownership rules, Goldman Sachs and UBS both have effective operational control over their China businesses. However, both these firms received a special dispensation because they got involved in securities firms that were distressed and it is widely believed that Beijing will not allow more similar set-ups under the existing regulations.

Deutsche Bank didn’t comment on the level of management influence it expects to have, but a source said that as CEO Wang will be responsible for appointing most of Zhong De’s senior managers. Meanwhile, Shanxi Securities will appoint the chairman of the supervisory board.

“Zhong De Securities combines unique strengths from both of its shareholders,” Wang said in a written statement. “We have the personnel, experience, infrastructure and ambition to become a leading firm within China’s domestic financial services market.”

Zhong De gets the go-ahead just as China is re-opening its A-share IPO market, which was suspended in September in light of the financial market turmoil, which saw both Chinese and international equity markets tumble. In late June, Guilin Sanjin Pharmaceutical became the first company to receive approval for an initial public offering after the sharp rise in Chinese share prices this year had indicated that the market would be able to absorb new issues. However, the regulators have been allowing smaller companies to go public first, no doubt to test the waters. Guilin Sanjin, a manufacturer of traditional Chinese medicine, sold Rmb910.8 million ($133 million) worth of shares, or 44% more than it initially planned, after the offering ended up heavily oversubscribed. The deal was arranged by China Merchants Securities.

According to media reports, another three companies have also received approval for A-share IPOs so far, including Hong Kong-listed Sichuan Expressway.

Deutsche Bank is the second international bank to get approval for a Sino-foreign securities JV since a moratorium on such JVs was lifted in May 2007 and since the new regulations were announced in December 2007. A JV between Credit Suisse and Founder Securities received its final business license in January this year and has been underwriting a few corporate bond issues since then.

Goldman Sachs and UBS were both allowed to set up businesses in China before the new rules took effect, in 2006 and 2007 respectively, but chose different routes to do so — Goldman through a joint venture with Gao Hua Securities and UBS through its direct 20% stake in Beijing Securities.

Meanwhile, CLSA has a JV with Hunan-based Fortune Securities under the name of China Euro Securities (CESL), which was set up in 2003 under regulations that were introduced as a result of China’s entry into the World Trade Organisation in 2002. Pursuant to the five-year rule, CESL was granted a brokerage license for the Yangtze River Delta area in June last year in addition to its underwriting license and the firm is now focusing primarily on the brokerage business.

The only other international investment bank to have direct exposure to China’s domestic market is Morgan Stanley, which set up the very first JV (China International Capital Corp) together with China Construction Bank in 1995. This “pilot” programme turned out to be a one-off at the time though and no further approvals were granted until after China’s WTO entry. Today, Morgan Stanley has no management input into the JV, but receives revenues in proportion to its 33% stake.

Morgan Stanley signed a memorandum of understanding with Huaxin Securities in early 2008 to establish a JV where it would be more actively involved, but this is still awaiting regulatory approval. Another firm waiting for approvals is Citi, which signed a MoU for a securities JV with Zhongyuan Securities around the same time in early 2008.

For Deutsche Bank, this license means that it is now able to offer all of its core global businesses in China as well. The German bank has made significant investments in China over the past 18 months and currently has a 30% stake in Harvest Asset Management and a 13.7% stake in Hua Xia Bank. It also has a derivatives license and is locally incorporated in Beijing, which means it can roll out a branch network should it decide to do so.

Shanxi Securities was founded in 1988 among the first group of securities firms to be set up in China. According to a statement in January, when the approval for the JV was received, it has more than 53 branches in Shanxi province and other major cities, including Beijing, Shanghai and Shenzhen. At that time, it had 800 employees.

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Source:, 08.07.2009 By Anette Jönsson

Filed under: Asia, Banking, China, News, Services, Wealth Management, , , , , , , , ,

China and Taiwan clamp down on risky wealth management products

China is nipping equity exposure in bank wealth management products, while structured product distribution will be treated with a heavier hand in Taiwan.

Following an announcement last week that the Taiwan Financial Supervisory Commission (FSC) is tightening structured product sales, the mainland market is abuzz with talk that the China Banking Regulatory Commission (CBRC) intends to clamp down on wealth management products linked to domestic equities and sold through banking channels.

The CBRC is said to be looking to put a stop to banks issuing wealth management products with A-share equities, unlisted shares or underlying funds, with the reason being that banks have exhibited that they are inadequately set up to manage investment risk. Wealth management products with QDII funds as the underlying assets are not expected to be affected at this point.

The banking regulator’s latest measure will follow its high-profile criticism of the banking industry’s wealth management practices issued in April last year, shortly after a delta-one product linked to a Barings Hong Kong fund and structured by UBS tumbled by half in value and liquidated. The incident caused public embarrassment and mass threats of class action lawsuits against its issuer Minsheng Bank.

The banking wealth management business first went live in China in 2005. Only banks have authority to issue wealth management products — a regulatory quip of terms which differ from fund or insurance policies sold through banks. These are targeted towards China’s newly rich, but largely unsophisticated high-net-worth clients, with minimum sales starting at Rmb50,000 ($7,352).

According to the CBRC’s published statistics, in 2008 alone, domestic and foreign banks sold a total of Rmb3.87 trillion ($567.1 billion) worth of renminbi and foreign currency-denominated wealth management products in China. However, at the end of 2008, all outstanding wealth management products were worth a total of Rmb823.3 billion ($120.6 billion).

How-How Zhang, an analyst at Shanghai research house Z-Ben Advisors, notes the CBRC move will be a reconfirmation of its previous stated policies against high-risk products; and should not bode any near-term danger for bank QDII developments.

At the height of the QDII craze in 2007, international fund execs fought to be taken onto banks’ wealth management platforms. A single deal with a bank at the time often translated into a multi-million boon for the fund managers. The trend failed to die off after the Minsheng scandal. Zhang says wealth management products with underlying structured products have since overtaken fund-linked products as the bankers’ preferred choice.

Since April 2008, banks have been forbidden to pass through QDII products as a mere distributor. Instead, they are required to assume the role as principal and be involved in product design and risk assessment — making banks the final party responsible for the products — although offshore fund houses or banks could be taken on as advisors.

In Taiwan, meanwhile, the familiar scene of the one-man day-trip sales exec will thankfully be put to an end with the implementation of a new law that tightens offshore structured product distribution.

Back in 2005 to 2006, when Taiwan was Asia’s hottest market for structured product sales, day-trip sales execs were often seen clearing billion dollars worth of deals by rolling their suitcases in and out of the airport on the same day. It was a sellers’ market. Product selection committees were largely under-formed. Such a person would only need two friends in any organisation: a senior official who sat on the management committee and a general counsel to make a deal happen.

Commercial banks and insurance companies at the time were often comfortable selling products already existing in the markets, and generally chose issuing investment banks based on factors beyond product risks, namely: quality and speed of execution, precision in settlements, quality in legal documentation, speed in secondary market making and customer communication.

Now the FSC will regulate structured products originating outside of Taiwan in two categories — wholesale and retail. Now wholesale investors must demonstrate sufficient risk management abilities, product knowledge and a minimum asset size of NT$30 million ($913,169).

The regulator will now apply multiple checkpoints for structured products intended for retail channels, to bring it on a level playing field with fund products.

On top of distributor’s internal product selection and compliance mechanisms, structured products must now be vetted by respective industry associations in banking, insurance and fund management before they are distributed to retail customers.

A legally responsible party must be installed onshore to distribute structured products from now on, either in the form of a local subsidiary or a master agent, who would have to put up guarantee deposits with the regulator before initiating sales in Taiwan. As creditors, investors hurt by actions of the issuer will be entitled to compensation from the deposit funds.

Also mindful of the final days of the Lehman Brothers’ mini-bond debacle, the FSC is stepping up the availability of liquidity for such products, as subscriptions and redemptions are now required to be published daily, with bidding and asking prices, available units made public to investors. Issuers need to get the central banks’ approval before they remit funds into and out of Taiwan.

The FSC will advise little beyond prudence and self-discipline for wholesale investors, hoping industry players will have the ability to self-assess and regulate., 30.06.2009 read article here

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Chinese regulator says US lending was ‘ridiculous’

TIANJIN, China – U.S. lending standards before the global credit crisis were “ridiculous” and the world can learn from China’s more cautious system as it considers financial reforms, the top Chinese bank regulator said Saturday.

Beijing curbed mortgage lending in 2003 and 2006 to keep debt manageable amid a real estate boom, while American regulators responded to a similar situation by letting credit grow, said Liu Mingkang, chairman of the Chinese Banking Regulatory Commission.

“When U.S. regulators were reducing the down payment to zero, or they created so-called ‘reverse mortgages,’ we thought that was ridiculous,” Liu said at a World Economic Forum conference in the eastern Chinese city of Tianjin.

He said debt in the United States and elsewhere rose to “dangerous and indefensible” levels.

Liu’s comments were unusually pointed criticism of U.S. financial regulation for a Chinese official. They added to suggestions by countries that are under U.S. pressure to liberalize their financial markets that Washington’s model might not be ideal.

China has based its reforms on the U.S. system but has moved gradually. It has kept its financial markets isolated from global capital flows, prompting complaints by its trading partners.

As China made changes, “a lot of the time, we learned that what we had learned from our teacher the day before was wrong,” Liu said, referring to the U.S.

China’s state-owned banks have avoided the turmoil roiling Western markets. Chinese banks hold bonds from failed Wall Street house Lehman Brothers, but they are a tiny fraction of their vast assets.

Liu compared Washington’s proposed US$700 billion plan to revive credit markets to fast food and said the world needed to look at longer-term solutions.

“Fast food is convenient. This US$700 billion package must ease the concerns and build up confidence. But if you only take this, it doesn’t agree with your stomach. You should think about Chinese slow cooking and slow food,” he said.

Liu called for governments to create international standards and regulatory systems for globalized financial markets. He said Beijing has signed information-exchange agreements on financial regulation with 32 other countries since the turmoil began.

Liu pointed to China’s experience with real estate and the collapse of a stock market boom.

As stock prices in China soared, banks were ordered to make sure customers were not using loans or credit cards to finance speculation. As a result, Liu said banks have suffered no rise in loan defaults even though stock prices have plummeted 63 percent since the October 2007 peak.

“We Chinese can share our own experiences with all the market practitioners,” Liu said. “Maybe our experience cannot be applicable to developed markets fully. But still, I think it might be useful and helpful to those in emerging markets.”

Chinese and foreign businesspeople at the World Economic Forum, the Chinese leg of the forum based in Davos, Switzerland, said the credit crisis is likely to increase the influence of China and other emerging economies in the world financial system, though Wall Street will retain its leading role.

“I believe this kind of regional financial strength will play a bigger and more important role,” said Jiang Jianqing, chairman of state-owned Industrial & Commercial Bank of China Ltd., the world’s biggest commercial lender by market capitalization.

“Right now the market is very unitary,” with U.S. bonds dominating global holdings, Jiang said. “This kind of a unitary, overcentralized market is something we need to change.”

Still, he said, Wall Street’s “dominance will continue.”

The European Union trade commissioner, Peter Mandelson, defended the global capital markets structure, warning that drastic change might hurt prosperity.

“The capital market system, fundamentally, is not flawed,” Mandelson said. “We are not looking for some alternative, and I hope that people in the emerging markets, in China for example, are not looking for an alternative to properly functioning capital markets.”

The crisis is likely to reduce resistance in the West to investments by government funds as companies urgently seek capital, said Thomas Enders, CEO of the European aircraft producer Airbus Industrie.

Critics have questioned the possible political motives of state-run funds and an EU official warned last year they might face restrictions if they fail to disclose more information about their goals and tactics.

“I would dare to predict that, yes, one of the big changes we will see is greater acceptance of sovereign wealth funds,” Enders said.

Source: AP 26.09.2008 JOE McDONALD,AP Business Writer

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