August 16, 2004

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The SCMP reports on Goldman Sachs' entrance into the Chinese investment banking business. Goldmans have entered a joint-venture with Chinese deal-maker Fang Fenglei. But nothing in China is that simple:

Bankers are calling Goldman Sachs' US$62 million "donation" to help refund investors of bankrupt brokerage Hainan Securities its entry ticket into the domestic securities market. It is the most bizarre element in the agreement between Goldman and its mainland partners to form a joint-venture investment bank in the country as Hainan Securities will have no direct link to the venture. But, in agreeing to help rescue a domestic broker, Goldman has won goodwill and other concessions for its joint venture, Gao Hua Securities.

The China Securities Regulatory Commission (CSRC) seems happy to let foreigners buy their way into the market, seeing it as a way to rescue dozens of near-bankrupt securities firms without public money...None of this would have happened without the "donation" to Hainan Securities. The money, equal to 380 million yuan, will be used to pay back clients of the company, which stopped operating more than four years ago after banks froze its limited assets at the request of creditors. Industry analysts estimate Hainan Securities' liabilities at 510 million yuan owed to 120,000 individual clients.

"This donation looks like a back-door deal," said one European banker. "If it were taking over Hainan Securities, it would be a normal payment. But it is not. It is setting up a new brokerage and has no dealings with Hainan Securities. It is a cost which the CSRC exacted from Goldman Sachs to get in the door before its competitors. Is this ... open competition? We wonder about the identity of the clients who will receive the money. The strong suspicion is that they are not shopkeepers and schoolteachers in Hainan but state companies and well-connected individuals in the rest of China." (my emphasis)

In other words China's securities regulator is prepared to let foreign bankers into China so long as they "donate" (ie bail-out) other failed firms. Luckily the foreigners are not being forced to take the dud firms on: they just provide the cash to solve the mess for the Government. But as the article points out, the cash will most likely go to those with the best connections rather than the most deserving. It almost looks like a large-scale official bribe: you bail-out these guys and then we'll let you get a licence to bank in China.

Call it business as usual, China-style.

posted by Simon on 08.16.04 at 03:16 PM in the




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Comments:

Funny how that looks and smells like a bribe, doesn't it? A donation? Please.

posted by: RP on 08.16.04 at 07:39 PM [permalink]




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