Goldman Sachs awaits venture approval

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Last updated at: (Beijing Time) Tuesday, March 23, 2004

Goldman Sachs awaits venture approval

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GOLDMAN Sachs Group Inc. may find out in the next month whether it will win approval from China to become the second U.S. securities firm to start an investment bank in the world's fastest-growing economy, people familiar with the situation said.

Goldman is negotiating to take a 33 percent stake in a venture with local banker Fang Fenglei and Legend Holdings Ltd., China's biggest computer maker, who will own the remaining 67 percent, the people said. The plan must be approved by the State Council, China's Cabinet.

Goldman, the world's biggest stock underwriter, lags behind Morgan Stanley in China. Morgan Stanley owns a third of Beijing-based China International Capital Corp., the nation's top investment bank, which arranged more than US$200 billion in equity funding and US$2 billion in debt financing since it was founded in 1995.

"They can establish relationships with up and comers,'' said Glenn Henricksen, who runs CIF Consultants in Hong Kong. "When those companies become big and do business internationally, Goldman will be well set.''

A locally licensed bank would help New York-based Goldman compete in a market for Chinese stock and bond sales that totaled US$14 billion last year. It would also provide a base to build a securities trading business in the world's sixth-largest economy.

Goldman plans to provide 52-year-old Fang, who helped found CICC, and his management staff with loans to finance a stake in the new investment bank, the people said, asking not to be identified. The venture will obtain its brokerage license from failed Hainan Securities Ltd., which is being liquidated, the people said.

The venture will be structured to limit any risk to Goldman from ties to the failed brokerage, which provides a quick means of obtaining the licenses, the people said. The loans may enable Goldman to take a majority stake in the venture once that is permitted in China, they said.

"Investment banking risks are more reputational than anything else,'' Henricksen said. "They need to have veto power.''

Fang's management team and Legend will form a separate company holding the stake in the investment bank. The second venture may be 75 percent owned by Fang with the remaining 25 percent held by Legend, though the partners may introduce a third investor, the people said.

Overseas investment banks have been deterred from expanding in China because they are limited to buying a one-third stake in a local securities firm. China hasn't said when that restriction will be lifted. Joint-venture banks can underwrite local-currency stock and debt sales as well as trade bonds.

China is inviting foreign competition in the nation's securities industry to help bring it up to global standards. China requires Sino-foreign investment banks to invest a minimum of US$60 million in any start-up.

Goldman turned down a chance in the 1990s to work with Fang to form CICC, which is controlled by China Construction Bank, the nation's third-largest lender.

Among overseas investment banks, Goldman and Morgan Stanley have managed the most global share sales by Chinese companies in the past five years. For stock sales by companies worldwide, Morgan Stanley ranks first this year and Goldman third.

Source: Shenzhen Daily

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