China reluctant to turn its markets over to MorganChase, Goldman Sachs

Section:

China Resists Pressure from U.S. Brokers

By Richard McGregor and Sundeep Tucker
Financial Times, London
Thursday, May 17, 2007

http://www.ft.com/cms/s/5699a190-0497-11dc-80ed-000b5df10621.html

China is resisting mounting pressure from the US banking industry for a speedy and substantial opening of its domestic brokerage industry, a sector that has become increasingly lucrative with the boom in China's stock market.

The dispute is the most intractable in a series of financial services issues on the table at next week's top-level talks in Washington between the US and China.

Hank Paulson, the Treasury secretary, and Wu Yi, a vice-premier, will lead teams from both countries at the so-called "Strategic Economic Dialogue," a twice-yearly forum held for the first time late last year.

Mr Paulson has pushed China hard for further opening of its banking, insurance, funds management, and brokerage sectors, on top of the partial liberalisation agreed to by Beijing when China joined the World Trade Organisation.

US investment banks including Citigroup, JPMorgan, and Merrill Lynch, are among those lobbying Mr Paulson, a former Goldman Sachs chief, because the securities brokerage industry won little access to China in the WTO deal.

Gaby Abdelnour, JPMorgan chief executive for Asia Pacific, says new entrants can help reform the sector: "Foreign banks would bring intellectual capital to the sector, such as technological and organisational skills."

The US banks' position has hardened in recent months as trading on domestic exchanges has soared to record levels just as Chinese authorities have been pushing local companies to list at home instead of offshore.

Goldman Sachs, Morgan Stanley, and UBS have struck deals to gain a foothold in China, but their operations are either tightly constrained or do not allow them management control.

Following the UBS tie-up with Beijing Securities, endorsed last August, Chinese regulators said they would not consider any further deals involving foreign banks for another year.

In spite of some support within China for a more liberalised financial services market, the China Securities Regulatory Commission has shown no inclination to open up the brokerage sector.

"The Chinese are concerned that if they let foreigners into the broking sector too quickly, they will kiss goodbye to the domestic industry," says Tim Ferdinand, a senior executive of CLSA, the Hong Kong-based broker that has a limited brokerage joint venture with China’s Fortune Securities.

The CSRC has floated a plan to allow a number of local brokers to list and use the proceeds to repay their government owners, which have recently helped to recapitalise them. They would allow foreigners to take stakes of up to 20 per cent as strategic investors.

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