Winning the China game

When star performer Xu Ziwang quit Morgan Stanley for Goldman Sachs, his old firm was badly hurt. Xu was a linchpin of Morgan's China plan - a strategy held in awe by competing bankers. Many freely admit the firm is out front in China and Xu's contribution to building the franchise was second to none. He personally brought in two of Morgan's landmark deals, the IPOs for Shanghai Industrial and Beijing Enterprises.

The single biggest contributor to success in China is having the right mainlander in place. Does this mean future deals go with Xu to his new employer? Superficially, it looks that way. Since Xu's arrival at Goldman in May, the firm has led an IPO for airline China Southern and won the global coordinator's role on the biggest China deal so far, the flotation of China Telecom. Since China International Capital Corporation, in which Morgan Stanley has a 35% stake, is China Telecom's financial adviser, this mandate appeared to have Morgan's name on it. Its loss was a severe setback.

The right guanxi

But as with everything in China, the reality is more complex and the rules less clear-cut than they first seem. Goldman won the China Southern mandate three years ago so Xu cannot take the credit, and China Telecom may have gone to Goldman for its telecoms expertise. Employing the right people, having the right guanxi (connections), displaying loyalty, spreading goodwill by supporting difficult deals and avoiding scandals are all important in China. But they don't guarantee success. Even the best strategy can be scuppered because a particular mandate had to go to a Japanese firm or a US firm as part of the bigger political and economic picture.

Still, capturing Xu from Morgan Stanley was an important step forward for Goldman Sachs, itself under a cloud for cutting back China staff in 1994 and 1995 when the market dived. Xu is a very hot property because he grew up in China and has western banking experience. Born in Shanghai, he spent four years as a farmer during the Cultural Revolution before graduating from university in Shanghai and going to the US to further his education. After six years in the US and two in Canada he was recruited by the Bank of Montreal. He joined Morgan Stanley in 1993 and was quickly sent to Hong Kong. Why did he leave? Xu denies it was for money or because of a falling out.

"I am a son of China," says Xu. "We all ultimately work for our homeland. After four years building the business at Morgan Stanley, it's better off for me to work for another firm which is very different in many ways. You aim to build the best credentials for the next thing you want to do." That, he says, may be government work or setting up China's own private investment bank. "Whatever will make a difference," he adds.

Xu represents a new generation of Chinese nationals. They talk in terms of improving their country's lot. They talk in terms of duty. They carry at the back of their minds an idea that the next century will be a Chinese one. They are not necessarily young. But often they look deceptively so. Xu is 41 but looks as if he's in his 30s.

"I think more and more Chinese who have been educated abroad will want to go back to the mainland," says David Li, chairman and chief executive of Bank of East Asia. Many are gaining experience in Hong Kong before they return to China proper. It is estimated that 400 mainland passport-holders are working in investment banking in Hong Kong.

Technology transfer

The big international firms are happy to sponsor the trend. They are training staff at a prodigious rate, and, in order to send the right signals across the border, are involved in numerous conferences and special pro- grammes. BZW is helping fund a new school of middle management in Beijing. Morgan Stanley runs a course at the People's Bank of China Graduate School of Business, to which even John Wadsworth, chairman of Morgan Stanley Asia, gives a two-and-a-half-hour lecture.

There is a self-interest aspect to this technology transfer. The big firms think that by helping China learn today they may have an advantage tomorrow. The prize everyone is after is a full investment-banking licence.

China's domestic market is the lure with its promise to be as big or bigger than America's. By now the numbers have become a cliché - China's 1.2 billion population represents fantastic potential for any kind of product. But continually restating the statistics doesn't negate them. The opportunities in finance are particularly seductive. In a country where listing began only five years ago, there are now 700 listed companies (the "A" or domestically available shares) with a capitalization that is already 40% of Hong Kong's. In three years it is estimated the markets will be equal. China's citizens have about $550 billion stowed away in savings, much of it ripe to be tapped by the yet-to-be-created mutual fund industry - another dizzying prospect.

Then there are mergers and acquisitions. The merging of small, state-owned companies into newly listed companies will - if done properly - create some of the world's largest enterprises. Does China need 37 airlines? Does it need 160 elevator companies? And then there's debt, both government bonds and corporate bonds when companies are finally allowed to issue them. A wilder card is the Euro-renminbi market when the Chinese currency finally becomes convertible.

A full investment-banking licence, it is envisaged, would allow investment banks to trade and underwrite "A" shares and become involved in all facets of domestic business. Currently, international bankers are largely confined to international equity issues. But getting there will not be easy. China is loath to let foreign players dominate its domestic business. Its preference is to restrict foreigners until the country's domestic investment banks can compete (see The local contenders).