BEIJING - As the Chinese government is considering easing controls over foreign
investment in the futures sector, international investors are reportedly
rushing into talks with potential mainland partners on possible merger and
acquisition (M&A) deals.
The Hong Kong-based securities brokerage CLSA is said to be in negotiations
with Xiangcai Qinian Futures, founded in 2004 with a registered capital of 30
million yuan (US$3.9 million), to buy a 20
million yuan stake in the company, according to the China Business Newspaper.
Without revealing the specific number of shares involved, the newspaper said
that Xiangcai Securities, the holding company of Xiangcai Qinian Futures, was
forced to sell the assets because of financial problems, but hoped to maintain
its controlling status.
If CLSA succeeded in its bid, Xiangcai Qinian would meet the minimum capital
requirement of 50 million yuan of registered capital set by the China Financial
Futures Exchange (CFFE).
The CFFE, the first financial derivative exchange in China, was established
last September to facilitate the country's futures trading. Analysts contended
that the stock index future - China's first financial derivative product - was
probably around the corner.
Chinese futures companies ranked among the last 50 are all potential candidates
for M&A by foreign institutions, says Liu Xu, a macroeconomic-policy
analyst with Capital Futures Co Ltd, as foreign investors tend to purchase a
physical entity at a relatively low cost to engage in the futures business in
China.
Goldman Sachs Gaohua Securities Co Ltd is reportedly seeking potential partners
among Chinese futures companies as well, so that its clients can invest in
stock index futures in the future.
Morgan Stanley, which once held a major stake in China International Capital
Corp (CICC), was also encouraging CICC to buy into futures companies.
According to sources with the Ministry of Commerce, some foreign investment has
actually penetrated into the futures sector by holding stocks in Chinese
futures companies, although the country bars foreign capital from the futures
sector.
The industrial guidance catalogue for foreign investment, currently being
revised by the Ministry of Commerce, is likely to open the futures markets on
certain conditions in certain areas, the China Business Newspaper report said.
A draft revision of regulations governing futures trading recently approved by
the State Council suggests that foreign investors may be allowed to acquire
Chinese futures companies.
Originally, Hong Kong investors were allowed to have no more than 49% of a
mainland futures company under the Closer Economic Partnership Arrangement
among the mainland, Hong Kong and Macau to encourage free trade.
Foreign investors could only merge and acquire mainland futures companies
through its Hong Kong branch, as in the trial case of Galaxy Futures, which was
jointly established by the Hong Kong branch of ABN AMRO Bank and China Galaxy
Securities Co.
Hong Kong investment still takes priority over foreign investment in the
M&A of mainland futures companies, but appears unattractive to those firms.
Hong Kong investment is not the best choice for mainland futures companies
because of lack of advanced management, which is exactly what the latter need
from their new shareholders to upgrade their brands, said Liu Songtao, general
manager of the Beijing branch of Shanghai Continent Futures Co Ltd.
The newspaper also said that a report from the China Securities Regulatory
Commission's research center had advised the government to bring qualified
foreign institutional investors into the futures sector.
However, foreign investors' entry into China's futures market by buying into
Chinese futures companies remains uncertain until further policies emerge, the
report said.
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