Gao’s mission as deputy chief executive of Bank of China’s Hong Kong branch is to turn around its investment banking efforts. Born in Xi’an in 1953, he’s not your average Chinese banker. Speaking to Euromoney 30 minutes before a flight to Beijing, he does not prevaricate. Nor does he avoid difficult questions about Bank of China’s investment bank, China Development Finance Corporation (CDFC). He pre-empts them. “For the past two weeks I’ve been more apologetic than at any time in my life about the quality of CDFC,” he says. “It’s a problem with the old system. The people need to be incentivized.”
Everyone in Hong Kong has a bad story to tell about CDFC, though on the surface it has been an enormous success story. Since mid-1993 it has been involved in more “H”-share syndicates than anyone else, accounting for about 70% of all the funds raised by Chinese companies listing in Hong Kong. But competitors don’t attribute this to the skill of the 14 corporate financiers working there but rather to the clout of the Bank of China, which is a lender to virtually every company that lists in the territory. Some bankers say CDFC relies on other syndicate members to sell its share of the underwriting and that its staff have a nine-to-five mentality. Despite this, it is to be joint global coordinator on the China World IPO, after being included alongside JP Morgan at the last minute.
The presence of Morgan should give investors some comfort. CDFC’s sole foray into sole lead-management was a fiasco. The HK$500 million (US$64 million) offering for ceramics manufacturer Guandong Fotao in 1995 was poorly organized with insufficient prospectuses at certain roadshows and management appearing badly briefed at others. The deal was pulled – the first time this had happened for an “H”-share candidate taken on an international roadshow. Gao is clearly not a man who will tolerate such failures in future.
Grand plans
Asked if he’s going to increase the size of CDFC, Gao replies: “It’s not a matter of numbers, it’s a matter of quality. I want to [be able to] go in there and find someone who can actually do the job, who can actually execute [deals].” The institution currently lacks any gweilos (westerners). Will this change? “I’m colour-blind. It’s the experience that matters. There are no gweilos yet. In that regard I predict we will have some. But you can probably see the historical burden of our institution. It’s not going to be a big bang, it’s going to be a long process.”
His secretary, who sits beside him taking notes, flinches when he mentions that it took half an hour to get his resumé printed because her computer is so decrepit. Gao’s predecessor didn’t even have a computer, so he’s had to order one for his office. Gao, who was personally recruited by Bank of China governor Wang Xuebing, talks with the sort of candour and clarity that would appeal to institutional investors. Not that he has any to worry about.
State-owned Bank of China with its 200,000 staff remains the biggest bank in China by assets, and, being the former foreign exchange bank, tends to have the closest relationship with China’s more internationally minded companies. Gao, who has had to deal with a lot of Chinese banks in his time, says Bank of China, relatively speaking, is the best institution. It also has a lot of money to invest in the new venture to be called Bank of China Asia.
“This is a very competitive market. We know we have some advantages. We have the support of head office. With our network in China we probably are going to be successful,” he says.
“If we make our staff fitter we can occupy a share of the market for the major privatizations ahead,” he says. Privatization? Isn’t that word taboo in China. “I’ve been saying that word for the past nine years,” says the man who founded China’s stock exchange executive council, helped set up the Shanghai and Shenzhen stock exchanges, and was a founder member of the China Securities Regulatory Commission (CSRC).
“The ultimate purpose of sending me here is to make it the biggest investment bank in the universe. But not in my lifetime,” he smiles. “I want to make it one of the biggest in the region.”
China Everbright Securities is another contender in Chinese investment banking – largely because of one man, China Everbright Group boss Zhu Xiaohua, a former deputy governor of the People’s Bank of China.
Restructuring is the aim
Since his arrival last year, Zhu has busily been reorganizing – he has introduced a matrix management system, for example. Profits from securities were Rmb100 million ($12 million) last year. This year, he says, they will be four times that. His big vision is to help China restructure its 118,000 state-owned companies. “Over the next five years the government will restructure state-owned industries. Investment banks are very important as a service to supplement the government’s goals.
“Most investment banks in China focus on underwriting and placements, and that’s all,” says Zhu, who has bigger ideas. “Apart from that we will focus on trust investment. By which I mean trust by the government to let us manage some companies. The government will trust us to manage them. We will send management in and establish a strategy of merger and development. We want to serve as the arranger that helps companies to merge together or, for example, to help a bigger factory to acquire a smaller one.”
He says China’s domestic securities business is ripe for restructuring too. There are about 800 securities companies. “The 15 largest will control the process of restructuring because the larger ones have important shareholders,” he says. Everbright is about the 10th largest. It uses regional offices to cover the whole of the country. For example, it covers Tibet from Chengdu – one reason, he says, why it is the biggest underwriter of Tibetan companies in the domestic market.
The danger for China Everbright Group is that its visionary leader will be plucked away for bigger things. Forty-eight-year-old Zhu’s name is bandied about as the next governor of the central bank.
If Everbright has big ambitions, a firm that is probably closer than others to dominating the domestic securities market is Shenyin Wanguo. This is despite being involved in a scandal earlier in the year in which the firm was banned from proprietary trading for 12 months after being accused of rigging share prices last autumn.
The Shanghai-based firm has 3,000 staff and 225 shareholders of which the largest are the Industrial Commercial Bank of China, the Shanghai Financial Bureau and Shanghai International Trust and Investment Corporation. It has underwritten a total of 158 “A” shares, amounting to 23% of those issued since listing was permitted. Of the foreign-targeted “B” shares, it has listed 37.2% via its Hong Kong subsidiary Shenyin Wanguo. It has about 25% of “B”-share trading, is the biggest player (with a 15% share) in the government bond market and it is also profitable, having declared earnings of Rmb521 million in 1996. The company is a product of a super-merger last year between the former first and second largest firms.
Chinese firms have a long way to go, especially if they are to become global players. But as Zhu at Everbright says: “The People’s Bank of China and the securities authorities want China to develop its own domestic investment bank.”
If the domestic market is protected from predatory competition from global players, China may have its very own bulge-bracket firms by 2030 – the year Zhu pinpoints for China’s becoming the world’s biggest capital market.
