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2 Surprise over French bank's China
pullout By Olivia Chung
HONG KONG - BNP Paribas SA, France's
largest bank by market value, last month pulled
out of its investment-banking joint venture with
China's Changjiang Securities after the two
parties failed to agree on a business-development
strategy.
This was the first case in China
of a foreign partner pulling out its investment in
a joint-venture investment bank, which has taken
market analysts somewhat by surprise. Given
China's gravity-defying stock market and tightened
government restrictions on
approval for new Sino-foreign
joint-venture brokerages, it now can be said that
it is payoff time for foreign investors in
securities firms, as the markets have turned
bullish after being dominated by the bear for
several years.
As part of its World Trade
Organization commitments, China has gradually
opened the securities industry to foreign players.
Under the rules, foreign investors can take as
much as 33% of an investment-banking venture and
20% of a brokerage.
So far, China has
licensed seven Sino-foreign joint-venture
securities firms. In addition to the Changjiang
BNP Paribas Peregrine Securities, the other six
are China International Capital Corp (CICC), BOC
International (China), China Euro Securities,
Daiwa SMBC-SSC Securities, Goldman Sachs Gaohua
Securities, and UBS Securities.
China's
lucrative securities market in the late 1990s
raised billions of dollars through initial public
offerings (IPOs) of A-shares, so foreign brokerage
houses were lining up to enter the securities
market in a bid to grab a slice of the pie.
As part of their plans to improve
corporate governance and efficiency and learn from
renowned foreign investment banks' expertise and
management experience, domestic brokerages were
also eager to attract foreign strategic investors.
US investment banking giant Morgan Stanley
was the first to enter the securities market in
1995, when it took one-third of CICC, the
country's biggest investment bank, affiliated with
the China Construction Bank, one of China's "Big
Four" state lenders.
After the launch of
BOC International (China) backed by Bank of China
International, the Hong Kong-based
investment-banking arm of the Bank of China (BOC),
BNP Paribas and Changjiang Securities formed the
joint venture Changjiang BNP Paribas Peregrine
Securities in 2003.
Changjiang Securities
is based in Wuhan, provincial capital of Hubei.
But the new joint venture, with registered capital
of 600 million yuan (US$77 million), was
incorporated in Shanghai. The French financial
group took a 33% share of the joint venture while
Changjiang Securities held the remaining stake. To
avoid conflicts of interest, the joint venture
took over Changjiang Securities'
investment-banking business.
However, the
joint venture did not have the blessing of the
stock markets. Since reaching its peak in 2001,
the Shanghai Composite Index, which tracks both
yuan-denominated A-shares and foreign-currency
B-shares, hit lows time and again, causing
hardship for many brokerage houses in China. To
make matters worse, the five-month ban on new
share offerings imposed by the China Securities
Regulatory Commission in August 2004 denied
brokers the IPO-related business.
Only
when the Chinese government nearly completed a
reform to turn non-tradable state holdings in
listed companies into tradable shares by the end
of 2005, the stock market began to rise out of a
five-year low, with the Shanghai Composite Index
surging 130% last year.
Despite the
bullish stock market, Changjiang BNP Paribas last
year only made 57.36 million yuan in business
revenue and 16.08 million yuan in profit, becoming
one of the worst performers among the country's 50
securities firms, according to Shanghai Securities
News.
Statistics show that the combined
profit of the 50 securities firms totaled 18.05
billion yuan in 2006, and only two of them
reported losses while the rest made money.
In addition to the poor performance of
their joint venture, the two partners, Changjiang
Securities and BNP Paribas, also held "different
views on the future development of the joint
venture", which eventually led to them parting
ways.
On January 22, Changjiang Securities
and BNP Paribas jointly announced the transfer of
the 33% equity interest, currently held by BNP
Paribas in Changjiang BNP Paribas Peregrine
Securities, to Changjiang Securities. Upon
completion of the share transfer, Changjiang BNP
Paribas Securities will become a wholly owned
subsidiary of Changjiang Securities and the name
of the entity will be changed subsequently.
"Both parties have developed their own
understanding of the capital markets and their
respective long-term growth plans ... It is
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