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China: Two sneak through

China has so far allowed just two foreign investment banks to strike deals to manage domestic securities firms. The deals are very different in structure, but both focus on the key issue of control and both are mired in controversy. Chris Leahy reports.


Although Chinese laws still limit foreign participation in domestic securities businesses to a passive shareholding not to exceed 33%, two deals claim to have bypassed these regulations, critically with the explicit approval of the Chinese government. The deals, one by Goldman Sachs, the other from UBS, underscore the power of the banks’ mainland connections and the pragmatism of the Chinese authorities.

Goldman Sachs’s transaction, Gao Hua, is an unusual and clever deal that has enabled the Wall Street giant to control the joint venture, albeit via a byzantine structure. Approved in December 2004, Gao Hua gives Goldman its coveted domestic securities licences and the right to underwrite and trade domestic equities and debt.

“We’ve been very committed to the China market since the early 1990s, and thought seriously about moving onshore three of four years ago,” says Michael Evans, chairman of Goldman Sachs Asia. “We considered many strategies, including buying an existing broker, building our own or waiting for the rules to change.”

In the end, Goldman chose a unique path. Its deal comprises two separate entities: Beijing Gao Hua Securities Company Limited (GH), which holds a domestic securities licence to broke and trade domestic shares and convertible bonds, and Goldman Sachs Gao Hua Securities (GSGH), a domestic investment banking firm that holds a licence to underwrite domestic shares, bonds and convertible bonds, as well as providing domestic financial advisory services.

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